Debt spreads for the top-tated emerging markets have fallen
Investors have pushed borrowing costs for highly rated emerging market governments and companies relative to developed markets to near their lowest levels since the global financial crisis, as traditional havens such as US Treasuries lose their lustre, write Joseph Cotterill and Alan Livsey.
The premium that investors demand to own investment-grade country and company debt over Treasuries has dropped to 1.04 and 1.1 percentage points, respectively. That marks the tightest level for sovereign spreads since 2007, while corporate spreads were also briefly lower than now before Donald Trump’s election as US president last year.
The move highlights how investors have become less worried about the potential fallout for emerging markets from Trump’s erratic trade war, and are instead focusing on some of these countries’ improving economic health. It also reflects wariness among some investors over US government bonds following the president’s repeated attacks on Federal Reserve chair Jay Powell and worries about government debt levels.
“The safe assets aren’t as safe as they used to be, and that is one factor pushing people into credit markets”, including emerging markets, said David Hauner, head of global emerging markets fixed-income strategy at Bank of America, who also pointed to “superstrong” global equity markets and a boost from a weaker dollar.
Emerging market “spreads to US Treasuries or German Bunds are tight, but the overall level of yield is attractive when you are seeing people lose faith in the traditional safe assets”, he said.
Overall spreads on the JPMorgan Emerging Market Bond index of sovereign borrowers — comprising investment grade and high yield — have fallen from 3.9 percentage points in April to just over 3 percentage points, the lowest level since early 2020. A corporate equivalent is down from 2.8 percentage points to 2.05 percentage points, not far off 2018 levels.