Chart of the day, sovereign credit spreads edition
Remember the Pimco chart which showed emerging countries trading through the G7? Turns out it was a mistake: Pimco was using the SovX Western Europe index, and not the SovX G7 index that it referenced in the relevant footnote.
The Western Europe index includes all of the PIIGS, including Greece, so it’s hardly surprising that it’s trading pretty wide right now. But in fact, if you look at Markit’s official numbers, it’s not trading quite as wide as the emerging-markets index:
How come Markit has the WE index trading tight to EM, while Pimco has the indices the other way around? The answer is pretty technical: the official Markit indices only go back to 2009, while Pimco wanted data going back to 2003. So Pimco put together their own proxy for the indices, which is simply the arithmetic average of the various components in the index. The actual Markit methodology, by contrast, is a bit more complicated: the components are weighted by present value.
Where does this leave Pimco’s thesis? The original chart showed the spread between emerging and advanced economies, and it’s fair to consider all of western Europe to be advanced economies. So the big picture there is absolutely right. But if you just look at the spread between emerging economies and the safest G7 bonds, the movement there is far less dramatic:
There’s much less risk between emerging-market nations and the safest and richest sovereigns in the world than there used to be. But there’s still a significant spread there, of well over 100bp. (It was actually 137bp yesterday.) There’s probably no such thing as a risk-free asset any more. But if you’re looking for something close, you’re still better off in the G7 than you are in the emerging markets.