Montreal, Canada

There's no doubting that this decade belonged to emerging markets. Equity and fixed-income markets in this asset class will post their best ten-year stretch since the early 1990s as we shortly conclude another decade next month.

As advanced economy stocks have languished over the last ten years as measured by the MSCI World Index (-1% per annum since 1999) the MSCI Emerging Markets Index has rallied 8.8% per annum. The BRICS, or Brazil, Russia, India and China – the biggest emerging market economies -- have gained 13.8% per year over the same period. By stark contrast, the S&P 500 Index has declined 1% per annum since 1999.

The emerging markets are the only broad-based global index to post a positive trailing ten-year return this decade; others, include MSCI EAFE (excluding USA), MSCI World and non-MSCI global benchmarks have logged flat to slightly negative returns in the 2000s. Adjusted for inflation until recently, returns have been even less impressive.

But the big story lies in the credit world this decade.

Incredibly, whereas major market credit dislocations almost destroyed the financial system in 2008, the emerging market credit environment has been buoyant, fueled by strong balance sheets on the corporate side, positive trade and budget surpluses and soaring commodity markets since 2002. The Brazilian real has ranked as one of the world's top performing currencies since 2002.

Ten years ago, the story was upside down. Asia was on the verge of total collapse as regional markets saw massive currency devaluations, a string of corporate defaults and a severe contraction of GDP in late 1997 and 1998. Russia defaulted on her GKO obligations in 1998 – or its foreign-issued sovereign debt-- ultimately resulting in a rouble currency collapse.

How things have changed…

The world's best-performing global bond index since 1992 remains the J.P. Morgan Emerging Markets Bond Index – up 12.1% per year. No other global bond index even comes close. And since1999, the benchmark has risen 11.4% per annum – outpacing the MSCI Emerging Markets Index by 260 basis points, or 2.6%, and with significantly less volatility.

But is this great performance already baked into prices? Credit spreads across the emerging markets spectrum either interpret a New Era for this asset class or a Black Swan in the waiting, or an unpredictable event that is totally unanticipated by the investment crowd.

Over the last several months I've been warning about a "bubble" developing in the emerging market credit world. Credit spreads, or the difference between these countries' debt markets and benchmark U.S. Treasury bonds, are sitting near all-time lows. Basically, investors have priced emerging market debt as almost less risky than T-bonds – not a senseless bet considering the scope of seemingly never-ending American deficits. But again, these developments are already baked into market prices.

For example, benchmark five-year Brazilian bonds trade at a 1.90% premium above Treasury bonds for the same maturity; and ten-year Brazilian debt sells at a 1.72% premium to T-bonds. These yield differentials have already discounted a host of U.S. economic challenges but do not discount any potential problems unfolding in Brazil. Indeed, Brazil is priced for perfection.

Even more remarkable is the current yield spread on Bulgarian US$ bonds. Bulgaria is basically a basket-case economically, battered by the credit crisis. Credit spreads on Bulgarian paper with a five-year maturity trade at just 2.57% above Treasury bonds. And Mexico, where oil production has crashed more than 50% since 2003 – ultimately leading to some sort of financial dislocation in the future -- is sitting on a 1.86% premium on six-year paper over Treasury bonds.

These and other sovereign credit spreads reflect anomalies that must come home to roost. Markets always work in cycles. Despite government efforts to seemingly control "bubbles" after the Mother of blow-ups in 2008, many countries harbor artificially low interest rates that don't reflect the current state of their economic woes or worse, the possibility of a Black Swan making an appearance.