Astonishing insights: emerging market debt spreads throughout the pandemic

We investigate how Covid-19 affects the emerging market (EM) bonds by analysing, on a standalone basis, investment grade (IG) and high yield (HY) debt per type of issuer. We document evidence that the option-adjusted spreads (OAS) of the IG and HY financials have recovered to the pre-Covid levels by the end of year 2020, while for the HY sovereigns and corporates the OAS remain twice as wide as before the pandemic. The weight of the liquidity component in the OAS for the IG sovereigns has climbed to astonishing 45%. Our results are potentially useful for investors, traders, risk managers and regulators.

Automated summary

The impact of Covid-19 on emerging market bonds varies by type of issuer, with investment grade and high yield debt showing different recovery rates; while OAS for high yield sovereigns and corporates remain wide post-pandemic, OAS for investment grade financials have returned to pre-Covid levels; liquidity component weight in the OAS for investment grade sovereigns has significantly increased.