Emerging sovereign debt spreads traded slightly narrower in volatile trade on Friday as investors moved to consolidate their positions at 4.5 percent of US Treasury yields. Overall, emerging debt spreads tightened 4 basis points on the benchmark J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) to 361 bps over US Treasuries. Total returns were flat.
"The market is still trading in sync with Treasuries, and the short-covering rally is driven by the consolidation of the 10-year Treasury note around 4.5 percent yield," said Siobhan Manning-Morden, emerging markets strategist at Wachovia Securities. The benchmark 10-year Treasury note slipped 11/32 in price. Its yield rose to 4.50 percent.
A rise in yields of US Treasury bonds, the global benchmark "safehaven" bond, is a disincentive for investors to buy emerging market bonds, which offer high yield to compensate for greater perceived risk.
The more yield "risk-free" US paper offers, the less reason investors have to bet cash on more exotic credits.
Brazil's global bond due 2040, considered the emerging market benchmark paper, rose 0.062 in bid price to 113, still above the 112 support level crossed earlier in the week. It yielded 9.042 percent.
"When the market has this heavy feeling to it you will see spreads widening because what most people will do to protect their positions is to short Brazil 40s, so you will see underperformance and pressure in Brazil bonds," said Enrique Alvarez, Latin America debt strategist at IDEAglobal. A short sale is usually made with the expectation that prices will fall. Brazil's spreads narrowed 4 bps to 423 bps over Treasuries as investors covered their positions ahead of the weekend after a week of sell-off.
In Colombia, the government said on Friday it will prepay a $1.25 billion loan from the Inter-American Development Bank on April 4, a move that will reduce by $313 million the country's foreign debt amortisations in 2006.
The prepayment will also reduce the nation's amortizations by $625 million in 2007 and another $313 million in 2008. The government will issue TES Treasury paper to raise the money to buy international reserves from the country's central bank to make the prepayment.
Colombia's spreads narrowed 7 bps to 368 bps over Treasuries. However, year-to-date, the credit has lost 2.1 percent, the worst performer on the EMBI+ so far this year.
In the Dominican Republic, the congressional opposition is refusing to pass laws allowing the country to restructure its external debt until the government stops threatening to prosecute officials of the previous administration for corruption.
President Leonel Fernandez's chief economic advisor, Julio Ortega Tous, warned on Friday that the impasse threatened to sabotage a $665 million standby agreement with the International Monetary Fund. The Dominican Republic's spreads however, have gained 9.24 percent so far this year, the best performer on the EMBI Global.
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