Thursday, August 27, 2009

Falling emerging markets risk premium

A number of emerging markets sovereign CDS spreads have tightened to the pre-crisis levels. The recession has been discounted completely. Part of the reason is that numerous investors bought sovereign protection in late 08/early 09. Recently they have all been getting out, forcing a sharp tightening. Here is Brazil and Colombia (some of the stronger EMG names):

Philippines, Indonesia, and Turkey:

The oil producing nations Mexico and Russia are still at elevated levels relative to the pre-crisis period, although Mexico is barely above. A jump in oil prices may tighten these some more.

Argentina and the Ukraine continue to trade at distressed levels.

As a comparison here is the US sovereign CDS spread - protection agains the default in Treasury bonds. Interestingly enough it still trades above the pre-crisis levels.

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