What’s behind the EMBI Global spread?

The “stripped” spread of the JP Morgan EMBI Global Index, which includes the dollar denominated debt of 61 emerging market governments, is still around 430bp despite falling slightly in recent weeks. This is close to its level at the end of 2003, even though there has been a marked improvement in the average credit rating of the countries in the index since then. While this could reflect investors’ expectations that the credit ratings of many of the constituents are set to be downgraded, we think it has more to do with specific concerns about a small number of troubled countries.