This post was taken from our March 5th weekly report.
In line with rebounding equity markets following the 4Q18 correction, credit risk-premia have compressed sharply. This is particularly notable for the big political risk plays of 2018. UK CDS spreads have narrowed as no-deal Brexit risk has been dialled back, while Italian spreads have benefitted from a marked de-escalation in budget politics. However, the biggest beneficiaries have been in the EM space where high-yield sovereign issuers such as Turkey, Brazil, Ukraine and Argentina have seen a 100-120bps reduction in 5-year CDS spreads from the trailing 5-month peak (coinciding with the global equity sell-off which began in October).
Given that economic imbalances and fragile balance sheets have not been fully resolved for many high-yield EMs, we view the recent shifts in CDS markets as an opportunity to acquire cheaper default protection. Turkey, in particular, stands out given the size of the recent CDS narrowing, and opens up an opportunity to more cheaply hedge any latent risk one may have to the country.
(Click on image to enlarge.)
Source: Bloomberg, Macrobond and Variant Perception