EME Macro/Strategy: at the crossroads

We have refreshed our bond yields models to gain a clearer picture of how far we are in the transition to higher interest rates, and to check which countries could have issues in terms of funding. In the CE4, we expect to see a further 150-200bp rise in 10-year local sovereign bond yields in the coming months, representing a meaningful tightening of monetary conditions overall, for which the effects are not yet showing in the data available. Greece should be shielded by the ECB’s QE activity and for Turkey, our models signal that all the stress is being put on the currency, and less on yields, although in the current domestic environment our yield model is not necessarily a good barometer of market conditions. While we do not amend our GDP estimates at this stage, we highlight a 1ppt downside risk to our projections at best and a growing risk of a recession approaching.