Friday, October 26, 2012

The emerging Markets Bond index

A few days ago(October 18th) , the Emerging Markets Bond Index (EMBI+) for Latin American economies was released. The EMBI+ tracks total return for traded external instrument in the emerging markets. There are two categories of such index. The JP Morgan EMBI global , and the EMBI+ index . The former covers the Brady Bonds, loans and Eurobond .The later has a more strict setting related to secondary market trading liquidity .Instrument in the EMBI + must have a minimum face value outstanding of U$$ 500 million. The J.P. Morgan indexes are a popular benchmark for money managers that deal in emerging market debt, so investors make a comparison with their mutual funds or exchange-traded funds. Because of their higher interest rates, emerging market bonds can significantly outperform U.S. Treasury bonds. For example, in the 10-year period ending in May of 2004, the J.P. Morgan Global Emerging Markets Bond Index had a total return of 248%, greater than both U.S. corporate bonds and the S&P 500.(read more at Concerning the Latin America economies, the EMBI+ index is a good indicator about the current position of these economies, to take advantage of the situation of traditional safety investment places. It becomes increasingly evident that the Euro Zone, is not longer capable to get out of its austerity trap soon.The USA is facing quite a challenge , with the so called Fiscal cliff, to be solve before the beginning of 2013. The BRIC group is in the adjustment path to new scenarios and Japan is still on its way to get a sustainable recovery. Thus ,all of the sudden, higher economic risk seems to have shifted to developed economies. Therefore, Latin America has the opportunity to take an higher share of investor preferences, as long as its economies risk level, does reinforce the perception of these economies, as reliable places to invest. In fact, the EMBI + average index for Latin America economies was 346, which means that taking as reference the Brady Bonds, any Latin America country might get financial resources paying a 3,46% return above those Bonds return. Sure, this average is misleading as long as there are economies which outperform the average (Venezuela , Argentina and Equator). But there are others, whose EMBI+ index fit quite well with market expectations and investment grade status. A somehow surprising case, is the EMBI+ index of Colombia (96), and PerĂº(91).These economies need to pay less than 1% above the base return of the Brady Bonds, to get external financial resources.Quite remarkable for both countries which have experienced the tragedy of terrorism ,at its most devastated level. It is important to keep in mind (as others have already said), that this results do not mean an insurance as a protection for wrong economic policies. It rather imply, that there is a path which can be pursue steadily ahead ,such that to consolidate this higher reliability status. Finally, the Chilean economy risk level (117),(like Brazil(133) and Mexico(139)), is below average but above the expected, which is a signal to take into account . Chile , like Uruguay, have the strongest institutional framework to deal with economics matters. Perhaps its weakness (shifting up its Risk level), is right on both the environment and energy institutional frameworks which still have some flaws to solve.