Emerging market debt spreads tightened on Friday as investors played the carry trade amid expectations the Federal Reserve will continue hiking interest rates at a measured pace.
Spreads narrowed by 7 basis points on the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) to 414 over comparable US Treasuries. Total returns were down 0.04 percent.
"Emerging markets seems to recover at the end of each weak because we still have redemption and inflows coming in," said Siobhan Manning, Latin American debt strategist at Caboto, the Italian investment bank. "There is still demand for carry trade given that the US backdrop remains supportive."
In carry trades, investors borrow short-term money at low interest rates to invest in higher-yielding securities such as emerging market debt. Spreads of Argentine, Brazilian, Colombian and Venezuelan bonds were the most active on Friday.
Spreads of Argentina's defaulted debt over US Treasuries widened 35 basis points on the EMBI+ to 5494 bps. Total returns dropped 1.33 percent after Argentina's government replaced its central bank chief on Friday, removing one of its most internationally respected figures just as it enters a crucial phase in its $100 billion debt restructuring. "The resignation of Alfonso Pray-Gay is negative for Argentina in the context of central bank independence and potential political interference from the economy ministry," Manning said.
Brazil spreads narrowed 21 basis points to 463 bps on the EMBI+ with total returns rising 0.73 percent after its Treasury Secretary, Joaquim Levy, said the government continues to target a primary fiscal surplus of 4.25 percent of gross domestic product this year, but the possibility of increasing that goal "always exists."
News that Venezuela plans to refinanced up to $1.5 billion of debt to buy back $700 million of Brady bonds drove investors to buy the country's credit.
Venezuela's spread narrowed 15 bps to 479 bps on the EMBI+. Total returns were up 0.31 percent.
"The refinancing is positive because they are reducing supply, the price is good and they are refinancing expensive debt with cheap debt," said Benito Berber, Latin America strategist at HSBC.
Venezuela was also supported by high oil prices, which have risen due to production shut-downs in the Gulf of Mexico ahead of Hurricane Ivan.
Colombia's spread, meanwhile, narrowed 16 basis points to 381 bps on the EMBI+ even after it increased its debt supply by issuing $500 million of new paper this week. High expectations with regards to tax reform passing through Congress and the progress President Uribe has made on his reelection legislation have overshadowed any technical set back, analysts said. Turkey's spread, however, widened 16 basis points to 342 bps on the EMBI+, down 1.18 percent in total returns after Prime Minister Tayyip Erdogan told the European Union on Friday not to meddle in Turkey's domestic affairs after an EU Commission spokesman expressed concern over a delay in key penal code reforms.
Erdogan told party members in televised comments that Turkey had done all it needed to do to meet the political criteria for starting European Union entry talks, adding: "Let nobody try to pressure Turkey by using the EU as an excuse."