REUTERS SUMMIT-Prudential's Peters uses barbell as rate hike looms

* For other news from Reuters Global Investment Outlook Summit, click on http://www.reuters.com/summit/Investment16 (Adds comments on energy sector)

By Jonathan Stempel and Ross Kerber

NEW YORK, Nov 17 (Reuters) - Gregory Peters, who helps manage more than $565 billion of assets at Prudential Fixed Income, said he is favoring investment-grade financial sector bonds and higher-quality junk bonds, as the Federal Reserve prepares to end its long tease of the markets and raise benchmark interest rates.

Speaking on Tuesday at the Reuters Global Investment Outlook Summit in New York, Peters said a rising rate cycle "is when you want to start buying bonds," and said he feels "really good about fixed income over the slightly longer term."

Peters, a senior investment officer who runs the Prudential (Amsterdam: PD8.AS - news) Total Return Bond Fund, forecast at last year's Summit that the Fed might wait until late this year or even 2016 to raise rates for the first time since June 2006.

He now sees an 80 percent chance of a December rate hike, after the central bank made a "policy mistake" by doing nothing in September. Peters said subsequent statements by Fed officials may have been intended to help markets price in an eventual hike, even as small as 0.25 percentage point.

"That overhang is more detrimental," he said, referring to the unfulfilled threat of raising rates. "It (Other OTC: ITGL - news) 's like being a kid: When you're constantly being threatened, the punishment ultimately doesn't work that well."

Peters has been emphasizing bonds from different parts of the credit spectrum, in a sort of barbell strategy, combining higher- and lower-risk assets.

He said he likes banks such as Citigroup Inc (NYSE: C - news) and Barclays Plc (LSE: BARC.L - news) , sometimes dropping down the capital structure to buy preferred securities for their extra yield.

Peters also favors short-term, "double-B" rated bonds, saying some junk-rated companies are "paradoxically" managing themselves more conservatively than their investment-grade counterparts, especially in the industrial sector.

"Spreads have moved on the investment-grade side in a meaningful way," he said. "At the same time, leverage is the highest I've ever seen going into a down cycle. So I really worry about what happens to these companies with the stock of debt growing so meaningfully."

Peters also said he is "quite negative" on energy companies, which have suffered from excess debt and capacity, and falling oil prices that he said could fall to $35 a barrel in 2016 from about $41 now, and more than $100 as recently as July 2014.

"There's no catalyst to move them higher," he said. "A lot of these companies are not going to go away gracefully necessarily, and so the capacity kind of remains high as well. I think this is a longer-term problem."

On the other hand, Peters said he remained "very positive" on structured securities, including high-quality collateralized loan obligations.

The economy, Peters said, should weather a rate hike, if there is one.

"It's not like 25 basis points is going to disallow (consumers) from getting a cheap mortgage," he said. "It's rare that you see us entering a recession without consumer confidence rolling over first, and we're not even close to that."

Peters nonetheless said the Fed has appeared "wishy-washy" about its commitment to raising rates and can use December's meeting to make its intentions, including for 2016, clear.

"I worry about them more trying to convince the market it's going to hike, and then they don't," he said.

Follow Reuters Summits on Twitter (Swiss: TWTR.SW - news) @Reuters_Summits (Reporting by Jonathan Stempel and Ross Kerber in New York; Editing by Steve Orlofsky and Alan Crosby)