In the third quarter of 2003, investors continued to favor riskier assets buoyed by abundant global liquidity, low interest rates in mature markets, strong economic growth (with low inflation), and improving credit quality. Credit spreads in emerging and Latin American markets narrowed in response, by 41 and 56 basis points, respectively, and are near historical lows in most emerging market countries. The EMBI+ index is well below its long run average, according to J.P Morgan. Issuers in emerging markets and Latin America benefited from the decline in spreads, as well as from the greater interest in their bonds by crossover investors. In the first three quarters of 2003 net emerging markets debt issuance, adjusted for bond buybacks, reached US$52.6 billion, close to the 2002 total of US$54.2 billion, according to Merrill Lynch. By region, Latin America had the largest share of total net issuance in the first three quarters of 2003: 49%. Many Latin American borrowers took advantage of strong investor demand to pre-finance borrowing targeted for 2004. Latin American bonds, which offered yields above those of Asia and Eastern Europe, accumulated the biggest gains in the first three quarters of the year, confirming the notion that investors have favored riskier assets and have searched for yield. Among Latin American bonds, those that offered the highest yields, such as Ecuador and Brazil, accumulated the highest gains. However, not only returns attracted investors to emerging debt markets in the third quarter. Fundamentals and improving credit quality were also a factor. Investors perceptions of the creditworthiness of emerging market issuers have improved in response to economic policy measures that countries have adopted to address high debt levels and boost reserves. Markets now perceive a much lower probability of default among emerging markets. The average 5-year default probability implied by the spreads on a range of emerging market credit default swaps is about half that expected 12 months ago, according to the IMFs Financial Market Update . The decline has been driven mainly by the reduction in default probabilities on Latin American sovereign issuers. As a consequence, after a respite earlier in the year, a series of credit rating upgrades in the third quarter reinforced a long-term trend of credit rating improvement in emerging markets