Emerging sovereign debt markets weakened on Friday in line with falling US stock indexes and the US dollar as investors maintained cautious positions in riskier assets due to heightened credit market concerns. A rally in US Treasuries, illustrating an investor flight to quality, undercut emerging market assets.
The historically volatile emerging market sector, however, has remained somewhat insulated from the credit market turmoil due to stronger government balance sheets and high commodity prices. The benchmark J.P. Morgan Emerging Markets Bond Index Plus showed yield spreads wider by five basis points to 225 basis points over stronger US Treasuries.
"We have pretty complex dynamics and emerging markets are caught up in that to a degree, although it is generally weathering the storm reasonably well," said Marc Balston, emerging markets debt strategist at Deutsche Bank in London.
Oil prices near record highs and a fall in the US dollar, which hit a 1-1/2 year low against the yen earlier on Friday, added to the US mortgage market woes and in turn increased investor anxiety. Continuous waves of unpleasant news from financial institutions grappling with the losses incurred from subprime mortgages have left investors raw to the elements of marked-down prices and massive losses in global financial institutions.
Venezuela's 2027 bond fell 0.375 points in price to bid 104.375, yielding 8.778 percent. Brazil five-year CDS spreads widened by about five basis points to 440 basis points, traders said.
Argentina's five-year credit default swaps (CDS), which provide protection against defaults and restructuring, suffered with a 38 basis point widening on the day. The cash bond 2033 Discount issue, however, was off just 0.375 points in price to bid 95.250.
Brazil, which announced the find of a massive oil reserve on Thursday, illustrated how emerging market investors don't have a uniform outlook. The benchmark 2040 bond showed a gain of 0.25 points in price to bid 133.688, yielding 5.587 percent. Meanwhile its five-year CDS rates were wider by roughly 11 basis points to 103.
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