Chart of the Day: Spreads Relative to Historical Highs

Interesting chart via a recent IMF report:


The chart above comes from Gary E., who also sends along this commentary: 

Angel Gurria,  Mexico’s external debt negotiator in the 1980’s and
-90’s and later Finance and Foreign Minister, (now Secretary-General of the OECD) used to take a beating
from the arrogant bankers he was forced to sit across the table with.
Wow, the tide turned! Now the banks are begging the governments they
once called "deadbeats" for capital. Beware, my emerging market
friends, once (or maybe if) the G7 christens their ‘inflation fighting
aircraft carrier’, the tide will turn.

unlike the 1970’s, EM is almost purely an inflation trade. And have you
seen Eastern Europe’s current account deficits? Bulgaria’s 21 percent of GDP
CA deficit financed by foreign real estate speculators?   Nevertheless,  look at
how the trade of buying historical highs and selling historical lows has paid.

Angel Gurria must be laughing now – about "20-year old traders in tennis shoes."


Spreads relative to historical highs
January 2008

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What's been said:

Discussions found on the web:
  1. Bob Harnett commented on Apr 14

    What does this mean for the markets? Credit spreads have never really made sense to me. Are you saying that the size of the spread has to come down and that the financial markets will rally?

  2. Alfred commented on Apr 14

    The question what will happen if and when the Fed “christens their inflation fighting aircraft carrier” is a compelling one. One would speculate that if the tide turns and the inflation trade in EMs goes away, that cap markets will have difficulties to adjust. Though today these economies are in way better shape than they were in the 70s or late 90s. Their huge foreign reserves will cushion them against external shocks. China is a case in point. A slowdown in western industrialized economies will not permanently reverse the China growth miracle.

  3. Vlada Kynsky commented on Apr 14

    Let me comment Bulgarian current account deficit. It is not only Bulgaria, it’s the sign from all CEE markets. Look at current account deficit in Central and Eastern Europe:

    22.9pc in Latvia, 21.4pc in Bulgaria, 16.5pc in Serbia, 16pc in Estonia, 14.5pc in Romania and 13.3pc in Lithuania.


  4. Fred commented on Apr 15

    Mexico – I am a big fan of the closer to home play for US capital in terms of international investing. As a region, LatAm (including VZ), has comparable GDP (not PPP) to China, yet boasts a per capita of like 4x that of China. Regionally, there is an internal consumer economy which really did not exist until the 1990s. Politically with notable exceptions in Argentina and Caracas, there is a high degree of integration with the US, Canada and Western Europe. Brasil has been busy buying USD to bolster its reserves given that it’s trade surplus is off a whopping 60% this year vs last. But, petrobras just discovered what may end up being the largest petroleum find ever. So even if the US starts to hike rates in concert with the ECB, both Mexico and Brasil have some every strong fundamentals that will continue to drive capital into their markets. I believe one can take or leave China and India. They are still fundamentally hot money markets. Any serious investor knows that you are long Mexico and Brasil – at least in part.

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