It pays to be a big fish in a small pond. Even though Brazil is mired in its worst political scandal for more than a decade, nothing can deter emerging market debt investors.

Spreads on the JPMorgan Embi+ index, where Brazil has the largest weighting, fell to 271 basis points over US Treasuries Monday, their lowest ever. Inflows into emerging market bond funds so far this year have reached nearly $5bn, another record, while almost $9bn has gone into emerging market equities, nearly three times last year's total.

The hunger for yield has sent emerging market bonds up over 8 per cent in 2005, while equities have outperformed both Europe and the US. The most recent batch of sovereign debt issues $2bn from Brazil and the Philippines was easily absorbed despite political troubles in both countries. Meanwhile, Argentina is planning its first foray back into the global credit markets since its debt restructuring last year.

The sustained fall in investors' risk aversion is supported by some long-term macro-economic improvements, such as reduced stocks of debt and lower current account deficits. But the current sweet spot for emerging markets cannot last for ever. Other assets will become comparatively more attractive, or commodity prices will finally turn. Even good old political risk cannot be ignored for ever. The unfolding bribes-for-votes scandal in Brazil, for example, may still claim its president's scalp. The economic consequences could be severe.

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