Emerging debt prices ease on position squaring

20 Aug, 2006

Emerging government debt prices eased in thin volume on Friday as investors closed positions ahead of the weekend and light US economic data next week. Brazil's global bond due 2040, considered the emerging market benchmark paper, eased 0.250 to bid 130.313 and to yield 6.493 percent.
Investors were squaring their positions after a positive week that delivered US economic data reinforcing expectations of a continued pause by the Federal Reserve of its monetary tightening policy.
US producer and consumer price indexes for July were lower than expected by market participants, supporting the Fed's decision to pause raising rates.
"The market has been very positive this week. The CPI and PPI readings were very subdued, so the course of the market is dictated by buying directly into what the Fed has said," said Enrique Alvarez, Latin America debt strategist at IDEAglobal.
"That is, that we have a slowing inflation pattern and that is coming from slower growth." With US rates on pause, investors are more inclined to buy riskier emerging bonds because they offer more yield than US Treasuries, which are considered the world's safest paper.
"Any other positives that may come about from the global growth scenario and from the US in particular, we may have a run at historical highs as far as spreads," Alvarez said.
Overall spreads have narrowed to 186 basis points over comparable US Treasuries on the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+), close to the narrowest level on record of 173 points reached earlier this year.
"If you look credit by credit, Brazil, Peru, you get the sense that most credits are back where they were in May, yet obviously we are at higher Fed fund levels. That means that the market in general is much more comfortable with risk overall," Alvarez added.

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