Leading EM In Credit Outperformance (Over G7)

Chile's stable creditworthiness has been reaffirmed this week, when the sovereign's 5-Year Credit Default Swap (CDS) pushed below the equivalent default protection instrument for the UK government. Markets are pricing in a lower default risk for Chile than the UK, where a record high fiscal deficit and plans for further borrowing over the next four years are starting to weigh on widespread perception of the UK government's creditworthiness. From 128.6 basis points (bps) back in June, Chile's 5-Year CDS has narrowed to a spread of 73.3bps on December 8, while the UK's 5-Year CDS has spiked from a recent low of 43.8bps at the end of September to 77.0bps in recent trading. Chile therefore trades 3.73bps inside of the UK 5-Year CDS contract, and we certainly see scope for further widening of the spread in Chile's favour.

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