Summary:
The chart compares U.S. BBB credit spreads (blue line, left axis) with emerging market (EM) stocks and bonds—the MSCI Emerging Markets Index (yellow) and J.P. Morgan EMBI Global Total Return Index (red), both on the right axis, over 1998–2026.
Historically, widening U.S. credit spreads (a rise in blue) correspond to downturns in EM asset performance, reflecting tighter global financial conditions and higher risk aversion. Major spikes in spreads, notably during the Global Financial Crisis (2008–09) and COVID-19 shock (2020), coincide with sharp declines in EM equity and bond returns. Conversely, when spreads compress—indicating easier credit and strong risk appetite, EM markets rally, as seen in the 2003–2007 and 2016–2019 upswings.
Since 2022, U.S. credit spreads have remained moderate near historical averages, suggesting stable risk sentiment, while both EM stocks and bonds have trended upward. The EMBI Global Index (red) shows steady long-term gains, reflecting resilient returns from sovereign and corporate debt, whereas the MSCI EM Index (yellow) remains more volatile and sensitive to global liquidity cycles.
Overall, the chart underscores a negative correlation between U.S. credit stress and EM performance: when U.S. credit risk rises, EM assets typically weaken, and vice versa. The current environment of relatively contained spreads implies continued global risk appetite supporting EM assets—unless another credit-tightening cycle emerges.
Figure 1: US BBB Corp Spreads vs EM Stock, Bonds
Figure 2: Australian Swap to Bond Spreads
