The abrupt shift in G10 monetary policy expectations has not only triggered a substantial repricing of long-end rates, but it has also underpinned a reduction in credit risk-premiums. This is particularly evident for emerging-market sovereign issuers where the cost of default protection has compressed since the beginning of the year. Given that unbalanced debt sustainability dynamics have still not been resolved in some cases, we view the recent re-pricing as an opportunity to selectively secure cheaper credit risk insurance.
Perhaps unsurprisingly, the biggest movers have been the highest yielders: Argentina, Ukraine, Turkey, and Greece. Default protection costs are still particularly high in the first two instances, while the risk of Greece suffering another major credit event over the medium term is arguably overstated given the strong institutional supports. That leaves Turkey where the implied probability of default over the next 5-years has fallen by around 7% points from the YTD high and is now a relatively conservative 28%. Brazil, with a 10% implied chance of default over the next 5 years, is also worth highlighting given the unstable debt trajectory – a factor which does not appear to be fully represented in credit spreads or CDS pricing.
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Source: Bloomberg, Macrobond, Variant Perception