Brazil's benchmark global bond due in 2040 plunged over 1.5 points on Friday as emerging debt markets sold off on fears that a quicker pace of US inflation may lead to higher interest rates in the world's largest economy.
Brazil's global 40 bond fell as much as 1.750 points to bid 125.563, its lowest intraday price since mid-December. Yields on the emerging markets' benchmark bond jumped to 7.168 percent compared to 6.946 percent late Thursday.
Total returns on the J.P. Morgan's Emerging Markets Bond Index Plus (EMBI+) declined 0.90 percent while Brazil's portion of the index sank 1.09 percent.
Yield spreads on the EMBI+, a key gauge of investors' aversion to risk, widened 7 basis points to 187 basis points.
"There are fears the Fed may need to raise rates further than people had anticipated a couple of weeks ago because of inflationary pressures," said Jeff Grills, a fund manager with J.P. Morgan Fleming Asset Management.
"And another concern is a scenario that the Fed will have to raise rates to combat inflation in the face of potentially weaker growth. That's a bad combination for investors," he added.
US import prices jumped an unexpected 2.1 percent in April, leading investors to believe the Federal Reserve has a good reason to keep raising its benchmark interest rate beyond the current level of 5 percent.
A further monetary tightening could draw some money out of riskier emerging markets assets, specially if US growth slows down as suggested by the University of Michigan's consumer sentiment survey released earlier on Friday.
The closely-watched University of Michigan's confidence index slumped to 79.0 in May from April's final 87.4, far below the median Wall Street forecast for a reading of 86.1.
"The data cocktail has kept the market heavy, because people are not willing to invest much more" in emerging markets, said Bear, Stearns analyst Alberto Bernal, referring to the fact that emerging market spreads have recently been trading close to their tightest level ever.
Reports of funds selling some emerging debt holdings were also circulating among traders, contributing to the poor market sentiment, analysts said.
J.P. Morgan Fleming's Grills said some European funds could be selling dollar-denominated emerging market assets to avoid the depreciation of the US currency, which has fallen earlier to fresh one-year lows against major European currencies.
Also on Friday, PIMCO confirmed it is taking profits on emerging countries' assets such as Brazil, Russia and Mexico, favouring holdings in Asia instead.