Citi Research highlights the ongoing volatility in Treasury yields, noting that they remain significantly above pre-Fed levels from the fall of 2024. Despite this, high yield spreads have shown remarkable stability, maintaining levels below 300 basis points for 75 consecutive days, a stretch not seen since 2007. Citi analysts attribute this resilience to an improving economic backdrop and a more favorable banking environment. "Treasury yields are rising through inflation breakevens and real yields, consistent with some tightening in macro financial conditions and an improvement in domestic growth expectations," the report states.
The normalization of the Treasury curve, characterized by a rare bear steepening, is seen as a positive sign for risky assets. However, Citi remains cautious, underweighting long-duration bonds due to rising real yields and preferring loans over bonds. The report also notes a strategic shift in their High Yield Factor Framework, with an overweight position in the Energy sector, citing robust domestic economic resilience and supportive commodity prices as key drivers. "We identify numerous catalysts for the Energy factor that should drive unique outperformance relative to other sources of risk," Citi analysts explain, emphasizing the sector's potential for growth amid changing domestic energy policies.