Global Emerging Markets Strategy: The EM Strategist

Research evidence excerpt

Global Emerging Markets Strategy: The EM Strategist

Global Emerging Markets Strategy

29 June 2026 Citi Research

We have been discussing the potential effects of rising US real yields in global

macro risk for the past weeks. Despite expectations of a more dovish influence on

the Fed’s monetary policy stance, investors are still lacking evidence of a short-

term generalized dovish bias at board level. In the meantime, both hard and soft

data economic surprise indices have seen some upside over the past months

(despite the oil supply shocks stemming from the Middle East conflict). The Atlanta

Fed GDPNow model suggests a Q2 estimate at c.3%, and core inflation gauges

remain relatively high if compared to the Fed’s official inflation targets. Most

importantly, in terms of macro regimes, if markets are indeed in a longer period of

expansion in productivity, we think it would be fair to imagine an upside bias in US

real yields. Sustained productivity gains tend to form expectations of higher

returns on investments, which empirically tends to push real yields in an economy.

The background scenario depicted above suggests a stronger USD if compared to

the broad USD dynamics in 2005. A potentially wider growth divergence between

the US and the rest of G7 indicates an even better-defined bias for higher USD vs

rest of DMs (EUR, JPY, GBP and others), but higher yielding EM FX may still perform

in such an environment. As we argued in previous reports, the rise in USD real

yields seems to be mainly driven by different factors, if compared to the dominant

inflation price discovery seen in 2023 (the most recent period of large acceleration

in US real yields and a period of poor returns in riskier asset classes).

Figure 1. 2v10s vs. 2y in US swaps Figure 2.