Emerging market bond insurance costs surge as rout bites

The cost of insuring swathes of emerging market countries’ government debt against a default were sitting at multi-year highs on Friday, as the global rout in riskier assets continued to gather momentum.

Major worries about China’s health, a potential U.S. rate hike and a slump in commodity prices are combining with some difficult individual country politics to create a near perfect storm for emerging market investors.

The pain has been showing in EM stocks which are at four-year lows and via a mass slide of Asian and commodity-linked currencies, but bond markets are starting to show an increasing degree of pressure too.

Turkey, South Africa and Saudi Arabia’s Credit Default Swaps (CDS), which bond buyers use to hedge the risk of default, have all hit their highest since 2013 this week.

China’s CDS are also just a whisker away from those levels and others have fared even worse.

A major political scandal rocking Malaysia has seen its CDS costs shoot to their highest since 2011 while a similarly toxic story in Brazil have seen default insurance cost sail to their highest since 2009.

This week though it has been Saudi Arabia that has seen the most jarring move. Its CDS have leapt more than 70 percent on worries that the falling oil price will not only whack its economy but also force it to scrap its long-held dollar currency peg.

Columbia too, where oil accounts for a fifth of government revenues CDS are at their highest since 2009. In Chile, which earns much of its money from copper sales to China, they are at the highest since mid-2012.

The sharp rise Turkish CDS has come for a completely different reason. It has been forced to call fresh elections after its main political parties failed to form a coalition government.

It is also fighting militants from both within and outside its borders and is seen as one of the most sensitive to a potential rise in U.S. interest rates due to its large amounts of dollar denominated debt that is expected to get more expensive to service as rates start to rise.