Exploit wide differences in valuations to position for higher rates, higher yields and inflation, the global chief investment strategist at Citi Private Bank has said.
Speaking at a press briefing titled ‘Outlook 2017 - Late-cycle stimulus: opportunities amid uncertainty’ held in Singapore on Tuesday, managing director Steven Wieting, said: ‘Our fixed income overweights at Citi Private Bank’s global investment committee yield 300 bps more than the underweight segments of the bond markets.
‘Yield premiums are historically wide despite historically low absolute yields.
‘Therefore, there’s a good chance that US yields adjusting up can offer good opportunities.’
The chairman of Citi’s global investment committee believes the risk/reward looks favourable for high yield this year, especially in the US, where the energy sector is in a state of repair.
‘If US Treasury yields were to rise by 200 bps across the curve, we would still estimate slight positive returns from high yield bonds. Of course, we don’t expect yields to increase by 200 bps.’
Fed risks underpriced
Another opportunity for higher returns from a higher rate environment is in the floating rate market, the expert said.
‘We think Fed risks are a little underpriced. That’s why we have added a significant overweight to high yield floating rate bonds,’ he said. Floating rate bonds have lower sensitivity to interest rate risk and a higher position in the capital structure.
He also likes select Latin American government and corporate bonds.
‘Latin America seems to be one region within the emerging markets where we feel comfortable with rising rates, though certain countries like Mexico are very vulnerable,’ said Wieting.
Citi Private Bank also favours inflation-linked Treasuries, financial preferred stock and select volatility structures.
It is underweight European and Japanese government bonds.
‘Last year, we were overweight duration in our bond portfolios. We thought lower interest rates for most of the year can generate good returns and that worked for us, even through the New Year period,’ Wieting said.
However, this year, Citi is taking greater credit risk, going neutral duration.
Wieting also revealed a trend prevalent among the bank's high net worth clients.
‘UHNW investors are deeply overweight duration. They have very high exposure to it in portfolios and it is generating considerable portfolio returns.’