In credit, Citigroup is focused on single-As and triple-Bs based on the yield premium they offer. Meanwhile triple- and double-A bonds are moving in line with the swaps curve and offer little protection against event or attribution risk, he noted. "If one or two investments go wrong here, it quickly wipes out any benefit that might have been had across the whole rating class."
At the other end of the credit spectrum, Scott is positive on high yield, but only moderately. "The risk-reward is still attractive, even though it's not as compelling as it has been since spreads have come in significantly over the past year." Scott declined to reveal Citigroup's allocation split across credit classes.
Citigroup would reconsider these positions if the U.S. economy slowed considerably in response to the Federal Reserve's tightening. Scott also noted the last time the Fed and the European Central Bank tightened in unison was in the late 1990s and should this occur in 2005 it would likely put a damper on the market.
The fund manager is cautious on duration because he anticipates the Fed will raise rates faster and higher than the market expects. "We think U.S. interest rates will reach 3-3.5% by the end of 2005, while the Fed Funds contract indicates interest rates will cap out at 2.5% by mid-'05." He added the historical neutral level for the Fed Funds rate is close to 4%. Scott declined to reveal Citigroup's average duration.