EM Credit Weekly: Carry dominates rich valuations

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EM Credit Weekly: Carry dominates rich valuations

EM Credit Weekly

25 June 2026 Citi Research

Carry dominates over rich valuations

The global macro backdrop is increasingly defined by an asymmetric and

unevenly restrictive US policy environment, where inflation ambiguity coexists

with still-tight financial conditions. Citi’s analysis highlights a persistent

divergence between inflation measures, with core CPI decelerating toward ~2.4–

2.5% while core PCE remains above 3%, reinforcing uncertainty around the Fed’s

reaction function. (US Economics - The Daily Update – Unevenly restrictive) At the

same time, Chair Warsh’s assessment that policy is “broadly somewhat restrictive”

but uneven underscores that transmission is concentrated in interest-rate

sensitive sectors such as housing, while equity and credit markets continue to

experience relatively easy financing conditions with tight spreads. This mix

sustains a higher-for-longer real rate backdrop, even as underlying inflation

pressures moderate, and explains why markets continue to price a non-trivial

probability of further tightening. For EM credit, the implication is a structurally

tighter external environment, where USD firmness and elevated DM yields anchor

spreads amid broadly stable domestic fundamentals.

Figure 1. Financial conditions have been tightening more Figure 2. Credit performance heatmap

recently

© 2026 Citigroup Inc. No redistribution without Citigroup’s written permission. © 2026 Citigroup Inc. No redistribution without Citigroup’s written permission.

Source: Citi Research, Bloomberg Source: Citi Research, FTSE Indices

Within this macro context, cross-asset signals point to a late-cycle regime

characterised by elevated valuation risk but still supportive liquidity, with an