Relative Value of Emerging Markets Debt

Abstract

The article examines Standard & Poor's and Moody's historical data on default frequencies, recovery rates, and rating transition probabilities to evaluate whether similarly rated sovereign and corporate bonds are comparable in credit quality. Under these three quantitative standards of creditworthiness, countries and corporations have had broadly similar performance. Somewhat lower default probabilities and more stable ratings of sovereign obligors are consistent with the history of emerging markets bail-outs. Although yield spreads over U.S. Treasuries have been persistently wider for emerging market sovereign bonds than for corporate bonds, credit qualities of sovereign and corporate bonds with the same rating are not markedly different.