Falling Emerging Market Risk Premium

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Includes: EEM, EWW, EWZ, GXG, IDX, RSX, TUR
by: Walter Kurtz

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 2008/early 2009. Recently they have all been getting out, forcing a sharp tightening.

Here is Brazil and Colombia (two of the stronger emerging market 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 against the default in Treasury bonds. Interestingly enough it still trades above the pre-crisis levels.