Emerging Market Default Risk Falls Back to Pre-Ukraine War Level
The cost of insuring emerging-market nations against default fell to the lowest in nearly a year as the dollar weakens and investors bet that less aggressive US tightening will bring relief to developing borrowers.
Investors took heart from Federal Reserve Chair Jerome Powell’s comments this week that while more US interest-rate increases are on the cards, disinflationary pressures are already materializing. The cost of hedging against a default by 18 emerging economies from China to Panama declined to 211 basis points on Friday, according to IHS Markit data, the least since before Russia invaded Ukraine last February.
The cost of insuring against default peaked last July as surging inflation forced the world’s major central banks to abruptly end the easy-money era, which had allowed emerging markets to borrow at record-low rates. The global decline of the dollar is helping to further ease concerns over how emerging-market countries will repay their international bonds.
“Borrowers are seeing light at the end of the tunnel given that many G-10 and EM central banks are getting closer to terminal rates,” said Mitul Kotecha, head of emerging-markets strategy at TD Securities in Singapore. “The weaker dollar is providing a major buffer.”
The average yield on dollar bonds sold by emerging-market sovereigns has fallen 181 basis points since October to 7.58%, according to a Bloomberg index. Still, it’s 223 basis points higher than a year ago.