Apples with Oranges

The one great thing about EM debt is the fact it simply follows B-school fundamentals. Credit, liquidity, political risks are more or less priced in. Investors know more or less exactly what they are getting into. It's no secret if your bond has a guy in power who is looking to nationalize everything, build a nuclear bomb, or make cheezy movies. Unlike fishy accounting - riots, civil wars, high inflation, etc., are all laid out in the open. Everyone invests in China, people has heard of China, buy lead painted Chinese toys, and eats kung pao chicken. But is China really making clear the risks involved to you? Plus firms like Cnooc and PetroChina are borrowing at 4-5%, doesn't make for attractive bargins.

Is investing in a current war zone any worst than investing in an American bond? Now I don't mean munis but some of current exotic corporates out there. For example, take MTN's tied to something. Toyota has priced several of these MTNs tied to caps, swaps, it's most recent CMS, claiming a interest target of 9%. Now I'm pretty lazy when it comes to options, if you are using CMS to hedge durations, that's fine, it what it's intended for, but they're talking about a serious arb move.

Honestly who would trust something like this :

"

The Notes will bear interest from and including the Original Issue Date to but excluding the Interest Payment Date on October 31, 2008 at the Initial Interest Rate of 9.00% per year. The Notes will bear interest from and including the Interest Payment Date on October 31, 2008 and each Interest Payment Date thereafter to but excluding the following Interest Payment Date until the Interest Payment Date on October 31, 2017 (each, a “First Interest Calculation Period”) at a rate equal to the Initial Interest Rate of 9.00% per year multiplied by the Barrier Amount. The Notes will bear interest from and including the Interest Payment Date on October 31, 2017 and each Interest Payment Date thereafter to but excluding the following Interest Payment Date until the Interest Payment Date on October 31, 2022 (each, a “Second Interest Calculation Period”) at a rate equal to 10.00% per year multiplied by the Barrier Amount. The Notes will bear interest from and including the Interest Payment Date on October 31, 2022 and each Interest Payment Date thereafter to but excluding the following Interest Payment Date (or Maturity, as applicable) (each, a “Third Interest Calculation Period”) at a rate equal to 20.00% per year multiplied by the Barrier Amount.
“Interest Calculation Period” means each First Interest Calculation Period, Second Interest Calculation Period and Third Interest Calculation Period, and “Floating Interest Rate Period” means collectively the First Interest Calculation Periods, Second Interest Calculation Periods and Third Interest Calculation Periods.
“Barrier Amount” means an amount calculated in accordance with the following formula:
n / N
Where:
“n” is the total number of calendar days in the applicable Interest Calculation Period on which the difference between the 30-Year CMS Rate minus the 10-Year CMS Rate (the “Spread”) sets greater than or equal to 0.0%; provided however, that the Spread determined on the fifth U.S. Government Securities Business Day (as defined below) prior to each Interest Payment Date (or Maturity, as applicable) shall apply to such U.S. Government Securities Business Day and each of the remaining calendar days in the related Interest Calculation Period; and
“N” is the total number of calendar days in the applicable Interest Calculation Period.
No interest will accrue on the Notes with respect to any calendar day on which the Spread is determined or deemed to be less than 0.0%. For each calendar day in an Interest Calculation Period that is not a U.S. Government Securities Business Day, the Spread for that calendar day will be the Spread determined on the immediately preceding U.S. Government Securities Business Day."

Now granted that CMS Rates are not specifically pegged like other interest rate swaps but this involves too many ifs. It boggles my mind as to who actually invests in stuff like this. At least if I'm investing in Sri Lanka, the war zone is paying me my 325 bps. It's clear on where the risks are and posts a huge sign in front it's crumbling infrastructure, warning the buyer to beware.