Brazilian sovereign bonds plunged on Friday, weighed down by news reports alleging that Finance Minister Antonio Palocci took bribes from contractors when he was a mayor.
Brazil's 2040 Global Bonds, seen as the market benchmark because of its high liquidity, plunged 1.250 percent to bid 116.563 with a yield of 8.504 percent. The yield had spiked as high as 8.598 percent, according to Reuters data.
The bond's price posted its biggest one-day decline in a month, while the country's currency, the real, dived as much as 4 percent on Friday, its steepest intraday fall since a corruption scandal alleging government party bribes to legislators broke 10 weeks ago.
The bond's spreads, a measure of perceived risk over safe-haven US Treasuries, widened by 10 basis points on J.P. Morgan's Emerging Markets Bond Index Plus (EMBI+).
"There's obviously one reason and that is nervousness around Brazil," said Gianfranco Bertozzi, vice president of emerging markets strategy at Lehman Brothers in New York.
Markets were jittery amid reports implicating Palocci, considered the chief architect of Brazil's macroeconomic reforms, to a bribes scheme when he was mayor of the Sao Paulo state city of Ribeira Preto before President Inacio Lula da Silva took office in January 2003.
Rogerio Buratti, the Palocci's former adviser, told prosecutors Brazil's top finance official received 50,000 reais ($20,000) per month from firms with trash collection contracts.
Palocci did not immediately respond to the allegations. Previously, Palocci has steadfastly denied involvement in an alleged scheme in which former top officials of Lula's Workers' Party bought votes in Congress. The allegations have rattled markets since they first surfaced in early June.
Lehman's Bertozzi noted that Brazil bonds have found support around the 116 level. "We're seeing a little support. So it's hard to imagine we're going to drop a few more points today."
Brazil's woes spread to the rest of the market, with overall spreads on the EMBI+, widening by 4 bps. Total returns were down 0.38 percent.
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