Citi's latest analysis highlights the ongoing volatility in Treasury yields, which remain elevated 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 note that the current Treasury sell-off is characterized by a normalization of the yield curve and rising inflation breakevens, which could signal an improving economic backdrop. "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," Citi states.
The report also emphasizes a strategic shift in their High Yield Factor Framework, with a renewed focus on the Energy sector, now overweighted due to its potential for unique outperformance. This comes as the sector benefits from robust commodity prices and supportive domestic energy policies. Meanwhile, Citi has downgraded Fallen Angels to underweight, seeking better upside opportunities in energy. The analysis underscores the importance of monitoring real yields closely, as they remain a critical input to risk appetite, while maintaining a cautious stance on long-duration assets.