Swaps Show Developing Nations Gaining on G-7: Credit Markets
By Abigail Moses and Shannon D. Harrington
Oct. 13 (Bloomberg) -- Credit-default swaps on bonds sold by Brazil, Russia, India and China are closing in on those tied to the world’s largest economies, which are piling on debt in an attempt to stoke growth.
The average cost of contracts protecting debt of the so- called BRICs dropped to 41.4 basis points more than the price of swaps on the Group of Seven countries and last week reached the lowest on record. The extra cost to insure the emerging-market nations’ bonds shrunk from 362 basis points, or 3.62 percentage points, in March 2009.
Record demand for emerging-market bonds is driving down the relative yields that investors seek to own the debt. Fixed- income investors are wagering nations including Brazil and China will continue to fuel the global recovery while the U.S., Japan and some of Europe’s biggest countries wrestle with budget deficits and sluggish growth. Developing nations will grow 6.4 percent next year, while developed economies will expand 2.2 percent, the International Monetary Fund said last week.
“Emerging markets don’t have the problems that developed markets are having right now,” said Mikhail Foux, a credit strategist at Citigroup Inc. in New York. “They don’t have the heavy debt load. They’re growing. A lot of them export commodities, and the price of commodities is increasing. Their populations are young and growing. So people feel really good about emerging markets in general.”
The average cost of swaps on BRIC nations has fallen 9 basis points since the start of the year to 116 basis points, while the G-7 average jumped 15 to 74, according to data provider CMA. The G-7 average includes swaps on the U.S., U.K., France, Germany, Italy and Japan. Swaps on Canada are not actively traded.
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