By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
The majority of investment grade emerging markets and several high yield emerging markets have a perceived default risk of less than 1 year compared to the United States
US debt ceiling
There are many good reasons to allocate to emerging debt, and now you can find another right on your Bloomberg screens. The US is a AAA rated economy (the highest sovereign rating tranche) and we are seriously discussing a possibility of default in the coming months (the debt ceiling debacle).
THE The 1-year credit-to-default (CDS) spread for the United States is currently wider than 1-year CDS spreads for the majority of the lowest-rated securities Emerging Markets Investment Grade (EM) – including Uruguay, Peru, Mexico, Chile, Panama, Czech Republic, Kazakhstan, Poland, Qatar, Kuwait, Saudi Arabia, Israel, Bulgaria, Hungary, Romania, Thailand, Philippines, Indonesia, India, China, Malaysia and South Korea ( see table below).
Emerging Markets Credit Quality
The 1-year CDS spread for the United States is also wider than the 1-year CDS spreads for all high yield emerging markets – including Brazil, Costa Rica, Guatemala, Oman, Morocco, South Africa, Bahrain, Serbia and Vietnam.
Let it sink in. Stay tuned !
Chart in brief: Perceived one-year default risks in the United States and emerging markets
Initially published by VanEck on April 26, 2023.
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PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; EMBI – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.
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Investing in international markets involves risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve increased risks related to the same factors as well as increased volatility, lower trading volume and less liquidity. Emerging markets may have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
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