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What's more risky - lending to an emerging market government, or to a big US corporation?
Historically, at least, the answer has most definitely been the emerging market government. You can't always trust them to hold up their end of the bargain - political instability often means that the government you borrowed from often isn't the one that ends up reneging on the deal. And then of course, there's the economic problems that tend to go with emerging markets over-reliance on single sectors, corruption, the usual sort of thing.
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But that's all changed now, apparently. Now investors will accept lower yields on emerging-market sovereign debt than on similarly-rated US corporate debt - for the first time ever.
So are things really different this time?
Bonds group Pimco points out that emerging-market government debt now pays a lower yield than corporate bonds in the US with similar credit ratings. This is the first time this has ever happened. As The Telegraph's Richard Fletcher points out, "you only need a memory that stretches back 10 years to find that, at the very least, surprising."
In that time we've seen the Asian currency crisis, Russia's loan default, Argentina's default on its debts - and that's not to mention more recent worries, like Ecuador's threats to renege on its bonds, and political upheaval in Thailand.
But there is something to be said for the argument that emerging markets have become more attractive and - in many cases - less risky. The commodities boom has benefited emerging countries more than developed ones, meaning most now have surpluses rather than deficits. They have been able to build up large reserves of foreign currency, "to cushion them from external financial shocks," says Tom Stevenson in The Telegraph.
And, says Pimco, more financial security means that governments are also issuing less debt, squeezing the supply of emerging market debt.
Meanwhile, the backdrop for US companies is worrying some investors. Theres the ever-present fear of a slowdown, or too sharp a rise in interest rates, or worries about Americas fiscal position, which by contrast to its emerging market cousins, is far from comfortable. In fact, more than one commentator has suggested that the US deficit is at banana republic' levels.
But for all that, we're still talking about countries like Russia here, where the concepts of ownership and legal process are still very much influenced by what the government thinks. And complacent investors should take a good look at Thailand a near-mainstream tourist destination, probably not the first Asian country you think of when the words "social unrest" are mentioned and yet, we've seen a coup followed by some nave and highly disruptive meddling in capital markets from the military government.
And of course, if there is any sort of rise in risk aversion among investors even if it is caused by a slowdown in the US - then emerging markets are likely to suffer from the dash to safety first.
So while we're not the biggest fans of the US as an investment region at the moment, investors are wrong to just throw caution to the winds in their hunt for somewhere else to put their money.
One developed market that we do rather like as regular readers will know is Japan. And on that note, the Nikkei 225 has finally managed to break through the 18,000 mark. You might remember that last week we mentioned that James Ferguson was monitoring the Japanese market for a very exciting 'buy' signal. It wasn't based on the Nikkei, but in any case, it now looks as though that signal has been confirmed, which is very good news for anyone buying into Japan just now.
More on this in next week's issue of MoneyWeek oh, and just before we go we know many of you are fans of our resident share tipster Paul Hill's pages in the magazine. We'll be sending you an email over the weekend with some more information on Paul's specialist email service, Precision Guided Investments. It's well worth reading look out for it.
Turning to the stock markets
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In London, the FTSE 100 closed 32 points firmer at 6,380, although off an intra-day high of over 6,400. Gas supplier Centrica was the day's best performer, having gained over 4% following news that its domestic arm, British Gas, had returned to profit. Congestion charge administrators Capita were the day's biggest losers. For a full market report, see: London market close (/file/mwu/1/26016/london-close-us-slip-trims-footsie-gains.html)
Across the Channel, the Paris CAC-40 closed up 11 points at 5,706, whilst the Frankfurt DAX-30 was 32 points higher, at 6,973.
On Wall Street, Iran's failure to meet the UN's latest deadline to cease nuclear enrichment hit investor sentiment, although it was a brighter day for tech stocks. The Dow Jones ended the day 52 points lower, at 12,686, as the likes of General Motors and Alcoa weighed. The broader S&P 500 was one point lower, at 1,456. However, strong results and merger news saw the tech-heavy Nasdaq gain 6 points to end the day at 2,524.
In Asia, the Nikkei was once again boosted by the weaker yen and hit a fresh 7-year high of 18,180today, having gained 79 points.
Crude oil was well above the $60 mark this morning, last trading at $61.00. In London, Brent spot was at $59.85 a barrel.
Spot gold had recovered from overnight lows and was last quoted at $675.00 today. Silver, meanwhile, had climbed to $14.24/oz.
And in London this morning, Lloyds TSB, the UK's fifth-largest bank, announced an 8% rise in full-year profits. However, investor concern that the figures were due to cost-cutting, rather than revenue growth, saw the bank's stock fall by as much as 3.1% today.
And our two recommended articles for today...
US subprime problems 'just the tip of the iceberg'
- An iceberg is interesting because only 10% is visible above the surface of the water. Likewise, those homeowners who are failing to keep up with the payments on their 'liar loans' - a.k.a. subprime mortgages - are the first signs of a much, much bigger problem. For Richard Benson's in-depth analysis of the current state of the US property market, read: US subprime problems 'just the tip of the iceberg'
When will UK house prices finally crash?
- Across the Atlantic, the UK housing market is also starting to look wobbly, but is a full-grown crash on the cards? In a recent cover story, now available to non-MoneyWeek subscribers - property market expert Fred Harrison examined the underlying forces affecting house prices. To find out when he thinks the property market will peak, click here: When will UK house prices finally crash?
