Debt Datapoint of the Day, EMBI+ Edition

I'm not sure if the concept of a "credit bubble" makes sense. To me, a bubble is something speculative, where people buy in the hope and expectation of flipping to a greater fool. Debt is being offered at ridiculously low interest rates, to be sure, but the people buying it aren't usually looking to flip it.

On the other hand, it's worth at least noticing that JP Morgan's EMBI+ index of emerging-market bond spreads hit an all-time high yesterday, yielding just 144 basis points over Treasury bonds. Of course, the index now is full of countries with enormous foreign-exchange reserves and rising creditworthiness: S&P just upgraded Brazil to one notch below investment grade, and with a positive outlook to boot. It's almost impossible to imagine a situation in which a country like Brazil or Mexico or Russia would default on its dollar-denominated bonds, as Argentina did only a few years ago. And so it's reasonable for an index of emerging-market sovereigns to trade tighter than high-yield debt from the likes of Ford and Chrysler, where default is far from unthinkable.

On the other hand, sovereigns do default, and much more frequently than the capital markets like to think. Ecuador, for one, has a very high probability of defaulting on its external debt if populist president Rafael Correa stays in power -- and there's no indication of his being kicked out any time soon. Ecuador is trading at 632 basis points over Treasuries, according to JP Morgan, which is where the EMBI as a whole stood not too many years ago. Credit spreads are bound to widen from these levels; the only questions are when and by how much.