A magazine report that Brazil's Central Bank President Henrique Meirelles is embroiled in a tax evasion scandal hit the country's bonds at the end of an otherwise quiet session for emerging market debt on Friday.
Weekly Istoe reported that Meirelles, who is well respected on Wall Street, and another director at the bank are under investigation by authorities.
The Central Bank would not immediately comment on the report.
"There are rumours about some new scandal involving Meirelles and a couple of other guys in the government," said a New York-based trader.
"Supposedly it's old news, but they're rehashing it again, and I guess the locals are getting a little bit nervous about it," the trader said.
Brazil's global 40 bond benchmark paper for the entire emerging market asset class, fell 1.125 to bid 96.375 with a yield of 11.420 percent.
Brazil's quarter of the J.P. Morgan Emerging Markets Bond Index Plus EMBI+ fell 0.38 percent, going against the grain of a mild uptake in the wider market. Brazil spreads widened by eight basis points.
Wall Street generally considers President Luiz Inacio Lula da Silva's government honest.
But prices of government bonds traded abroad were hit hard at the beginning of the year after an aide to Lula's influential chief of staff Jose Dirceu was caught on video collecting campaign funds and a bribe from a gambling boss.
Ecuador's high yielding sovereign bonds got a lift from investors seeking yield in an otherwise flat emerging debt.
Ecuador's portion of the EMBI+ rose 0.91 percent in total returns while country spreads tightened by 15 basis points.
Ecuador's Congress on Thursday passed a smaller tax increase than the government had proposed to raise pensions and suggested using cash held in other state entities to help finance the difference.
But officials in President Lucio Gutierrez's government have hinted he may not accept all of the lawmakers' changes.
"Perhaps the market likes the fact that Gutierrez is taking a little more of a hands-on approach," said Alberto Bernal, head of Latin America research at IDEAglobal.
"But the price movement has more to do with the fact that Ecuador is the highest return builder at this time," he said. "With Treasuries unchanged and the Dow coming down, Ecuador seems like an interesting acquisition for some capital gains."
The Dominican Republic missed a $27 million sovereign bond payment on Friday, but officials said the government will make it before a new president is installed in mid-August and the bonds were not affected.
"You are not in actual default until 30 days pass," said Bernal.
"Basically the market is very comfortable with the story that they will eventually pay," he said. "If that was not the case bonds would be collapsing.
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