We haven’t posted a chart in awhile, but thought this one was worth noting. Below is a chart showing the spread between J.P Morgan’s emerging market bond index and US Treasury bonds.
A couple of points. Along the lines of our ongoing theme of a return to a risk culture, Barley notes the spread between emerging market bonds and Treasurys has come down from some 800 bp at the height of the crisis down to 330 bp. While the spread has not regained its 2007-08 low it still indicates substantial investor interest in emerging market risk.
Second note how the peak spread this time around is lower than other spikes earlier this decade. While there has been some shifts in the composition of the index in the meantime it indicates that emerging market bonds have become, in the eyes of investors, more stable in the interim.
In the accompanying article Richard Barley at WSJ discusses the global government bond markets with an eye on the narrowing spread between developed market and emerging market bonds. He writes:
The result is that yields on developed- and emerging-market government bonds are likely increasingly to converge, even though there will be volatility along the way. That would reflect the likely rebalancing of the global economy in favor of emerging markets — and reward investors who are willing to rethink risk.
Most investor attention in focused on emerging market equities, but it is worth keep an eye on emerging market bonds as an indicator of global risk appetites.