By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
U.S. Debt Ceiling
There are many good reasons to allocate to EM debt, and now you can find another one right on your Bloomberg screens. The U.S. is a AAA-rated economy (the top sovereign rating bracket), and we are seriously discussing a possibility of default in the next few months (the debt ceiling debacle).
The 1-year credit default swap (CDS) spread for the U.S. is currently wider than 1-year CDS spreads for the majority of lower-rated Investment Grade emerging markets (EMs) – 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 chart below).
EM Credit Quality
The 1-year CDS spread for the U.S. is also wider than 1-year CDS spreads for the whole bunch of High Yield EMs – including Brazil, Costa Rica, Guatemala, Oman, Morocco, South Africa, Bahrain, Serbia and Vietnam.
Let this sink in. Stay tuned!
Chart at a Glance: Perceived 1-Year Default Risks in U.S. and EMs
Source: Bloomberg LP.
Originally published by VanEck on April 26, 2023.
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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