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http://blogs.marketwatch.com/thetell/20 ... ill-taper/
Cost of insuring emerging market debt soars on fears Fed will taper
The cost of insuring debt issued by Mexico, Brazil and other emerging-market governments against default jumped sharply on Tuesday, underlining the hit took by equities and bonds across the developing world as investors grow skittish over ideas the U.S. Federal Reserve may begin to put a crimp in the flow of liquidity it has provided the market through its bond-buying program.
As yields on U.S. Treasurys jumped, the spread on Mexican credit default swaps, or CDS, widened to 147 basis points Tuesday from 128 basis points a day earlier, according to data provider Markit. CDS are instruments that can be used to insure debt against default. The move means that the annual cost of insuring $10 million of Mexican debt against default for five years jumped $19,000 , to $147,000 — a big rise.
Moreover, the cost of insuring Mexican debt against default has doubled since May 9, noted Gavan Nolan, director of credit research at Markit, in a note. That’s around the time that fears the Federal Reserve may begin to scale back the size of its liquidity-providing asset-purchase program became more acute.
As the chart from Markit shows, it’s a similar story for Brazil. The CDS spread at 185 basis points is the widest since November 2011. And Nolan notes that all 14 components of Markit’s CDX.EM index, which tracks a basket of emerging-market government debt CDS, saw spreads widen significantly as investors turned away from high-yielding assets that had previously benefited from the Fed’s quantitative-easing program.
“It may be that we are seeing what happens when an overbought risk asset market adjusts to life without central bank largesse,” Nolan wrote.
It was the Bank of Japan that left markets high and dry Tuesday as it not only made no changes to its monetary policy stance but also made no comment on volatility in Japanese government bonds. That was seen as disappointing given that choppy action in Japanese government bond yields have been affecting sentiment across global markets, Noolan noted.
– William L. Watts
Follow on Twitter @wlwatts
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