Milestones and pivotal turning points are easy to spot – at least in retrospect. Last month, a little-publicized event took place in the emerging markets that few participants ever dreamed possible. For the first time, the JPMorgan EMBI Plus index traded at a spread to duration-matched US treasuries that was below 200 basis points.
Never – not since the EMBI was created in the 1990s, not since the term “emerging markets” entered the financial lexicon in the 1980s, nor even since the birth of floating global rates in 1944 at the Bretton Woods conference – has risky debt been priced so high and paid so little. As recently as last June, when the EMBI spread dipped below 300bp, the market watched in jubilation for those on the long side, panic for those on the short side, or simple astonishment for those temporarily on the sidelines.
So what, if anything, does this supposed milestone mean? That depends on which side of the deal you are on. For the sell side, more often than not selling long-only trades, the EMBI’s gymnastic dip below 200bp legitimizes a mantra of upward emerging market credit rating migrations, external fiscal accounts overflowing with dollars, and commodity revenues soaring sky-high.