From a credit perspective, the emerging market bond sector is the most compelling short speculation over the next few years. And Brazil, the largest debt issuer in the sector is now not only rated investment grade but also widely believed to be the next super economy this century as resource revenues continue to fatten its foreign exchange reserves and drive massive foreign direct inflows into Latin America’s largest economy.

Brazilian debt isn’t alone in “bubble” territory. Other credits in the region are expensive and many others in Eastern and Central Europe will probably default before the deepest economic recession in more than 75 years leaves them in ruins.

Is Brazil invulnerable economically? How about China, India or Russia?

It’s incredible to find credit spreads for emerging market bonds at just 430 basis points or 4.3% above Treasury bonds; prior to the big collapse in late 2007, the J.P. Morgan Emerging Market Bond Index saw its spreads collapse to barely 200 basis points over Treasury bonds before widening amid a credit crash in 2008.

About twenty years ago former U.S. Treasury Secretary, Nicholas Brady, launched a series of dollar denominated debt to help Latin America out of its economic malaise. Dubbed “Brady Bonds,” these instruments helped Brazil, Mexico and other countries out of the economic abyss. Can the same event repeat itself? Inflation went out of control in Latin America in the 1980s resulting in defaults, devaluations – you name it.

Now everything with an emerging markets bias is skyrocketing again – just like in 2006. This is especially true in South America – the best performing emerging market index since 2000 and up a stunning 43% in 2009.

Brazilian credit spreads have tumbled to 290 basis points (2.90%). Other regional economies have also seen spreads tighten, including Peru (260 basis points), Mexico (227 basis points) and Colombia (319 basis points). Argentina, which remains an economic pariah, is the lone black sheep with spreads at a whopping 36.9% above T-bonds.

I find it hard to believe that Brazil, yet alone Colombia and Peru deserve spreads under 400 basis points above Treasury bonds. It’s almost ridiculous. Basically, investors now believe that emerging market bonds are almost the same credit risk as Treasury debt or even German bunds.

At some point, eventually, emerging market bonds will witness an unprecedented crash. Whether this collapse lasts months or years is hard to forecast; but it does seem plausible that if commodities prices head sharply lower again or if China’s seemingly amazing economic rebound falters that spreads will surge overnight. Perhaps a sovereign debt default in Eastern Europe might spell the end of the boom. Herein lies the Black Swan.

If an asset class is invincible and almost impossible to bet against then the odds of making big bucks from a sudden reversal in the primary trend are spectacular. It’s only a matter of time until conventional wisdom is defeated in the emerging market bond sector. When that happens, I’ll be there.

Learn more in the upcoming issues of The Sovereign Individual and how to profit from one of the greatest speculations since the Great American real estate crash two years ago.