The shifting focus of fixed income investors

- Overview: "With the relationship between risk assets and fixed income weakening, we take a cautious stance on duration risk and return to neutral. - "We continue to favour owning euro government bonds over US Treasuries and UK Gilts."
- "We expect 2s10s curves to retain a strong directionality and re-steepen on higher yields. We note the recent breakdown in directionality in 10s30s in the US and Europe but do not expect this pattern to persist."
- US Rates Strategy: "We examine the reasons behind the Treasury market’s seeming lack of response to the rally in risk assets."
- Euro Rates Strategy: "Yield curves continue to display significant directionality. Conditional 2s-10s bearish steepeners offer a low-cost vehicle for positioning for a reversal of the recent bullish flattening dynamic."
- EMU spreads: "Investors in European bonds have been extending duration in recent weeks. With fundamentals taking a back seat as risk appetite recovers relative cash flow holds the key to explaining recent demand."
- Sterling Rates Strategy: "We examine the challenges facing investors from the fiscal headwinds to growth and the risk of “sticky” inflation. We think the steepness in the mid-part of the curve provides the solution."
- APAC Rates Strategy: "Pay JPY 2yr fwd 3yr against 5yr fwd 5yr. Long AUD/USD
bills/Libor basis in the >5yr sector. Buy NZGB Dec-17s, pay maturity matched swap."
- Global Inflation Strategy: "The prominence of cyclical concerns has made break-evens (BE) more directional. In the UK, the shift to CPI from RPI pension indexation does not deter us from our long front-end BEs view. We also find 10yr IL gilts cheap on an ASW basis, whereas euro linkers are relatively rich."
- USD and EUR flow analysis: "Investors in European bonds do not seem to be afraid to increase positions and extend duration. In EMU spreads, differentiation on the basis of fundamentals appears to have taken a back seat. In the US, we saw good buying of 10yr Treasuries and receiving of 2yr swaps."
Citigroup International Interest Rate Strategist 20100715