Emerging markets bonds held their ground at historically low spreads on Friday, supported by uncertainty over the future of interest rates in the United States and investors appetite for high yield.
Spreads against the sovereign debt benchmark, the US Treasury notes, tightened by 1 basis point to 274 bps, as reflected by JP Morgan's Emerging Markets Bond Index Plus (EMBI+), matching a record touched the first time a month ago.
Meanwhile total returns for the high yield asset class rose 0.18 percent. So far this year the EMBI+ shows total returns of 8.138 percent.
Brazil's global bond due in 2040, the most traded paper in the class, led the market with a 0.062 percent gain to bid at a record high of 120.250 with yields of 8.003 percent. Other high-yield paper such as Ecuador's global 2012 bonds followed by rising 0.125 percent in price, bid at 100.750, with a yield of 7.319 percent.
Market specialists said support was also coming from a possible interruption of the US Federal Reserve rate tightening cycle at its next meeting on September 20 meeting to address a slowdown of the US economy in the aftermath of Hurricane Katrina.
"I believe the current market strength can last until the Fed makes a decision," said Rafael de la Fuente, emerging markets analyst with BNP Paribas in New York. Lower interest rates in the United States push down yields for US Treasuries, which in turn motivate investors to seek bigger returns on higher risk paper. The US 10-year Treasury note currently yields 4.126 percent.
"Why won't investors want to keep collecting the higher interest rates in emerging markets? Probably the biggest risk is an upturn in inflation in the US which could force the Fed to raise rates faster than most think," said Douglas Smith, Chief Economist for the Americas with Standard Chartered Bank. The political scenario in Latin America remained clouded by the Brazilian bribery scandal surrounding the ruling Workers' Party.