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Citi Research: June 2–8, 2025 Market Insights

Market Sentiment & Equity Views

• US soft data softened but equity markets remain optimistic due to AI recovery; overweight NDX/RTY trade.
• Tariffs are expected to push US inflation higher; keep hedges for proceeds outside the US.
• Fade negative rate pricing by adding CHF payer; JGBs are attractive due to structural labor issues.
• Gold remains bullish but patience for stronger momentum or better options value; UK UW replaces emerging Asia UW.

Emerging Markets (EM)

• USD price action bearish supports EM valuations.
• Back-end US Treasuries under pressure due to cautious foreign real money; local currency bonds may continue inflows supported by performance tracking.
• FPIs likely to flow into high-growth Asian countries; Asia FX tracking EUR/JPY despite widening US-Asia rate differentials.

Currencies

• USDJPY could recover to ~¥150 by end of Q2 but expected to fall below ¥140 by Oct–Dec; yen rate rise may prompt strategic JPY longs.
• CAD supported by rate differentials; USDCAD could drop to 1.34 if US unemployment rises to 4.3%; weaker Canadian payrolls mute downside.

Fixed Income

• Wells Fargo asset cap removal modestly boosts agency MBS bank demand; REIT shares rose 13% YoY, partially offsetting broader flatness.
• High-quality corporate loans outperformed High Yield YTD despite May rally; HY factors driven by lower-quality names.
• Spec positions in MBS viewed as fairly valued relative to TBA, with preference for FL 6.5–7.0s based on OAS and model accuracy.

Key Analyst/Team Notes

• Dirk Willer: Global Macro
• Adam Pickett & Co.: FX/EM
• Luis M. Costa & Others: EM Strategy
• Osamu Takashima & Brian Levine: USDJPY Decline Risk
• Others: Equity, High Yield, MBS, FX