Investors' aversion to emerging market sovereign debt declined on Friday as bond markets took a mixed US jobs report as a sign the world's largest economy is slowing moderately, without threatening exports from developing countries.
The US economy added only 51,000 new jobs to nonfarm payrolls in September, far less than the 125,000 expected. However, jobs figures for August and July were revised upward. While equity investors decided to sell stocks on concerns about a slowing economy, bond investors focused on the data revisions to conclude that the likelihood of a sharp economic slowdown - and interest rate cuts by the Federal Reserve - has decreased.
Yield spreads between emerging debt and US Treasuries, a key gauge of risk aversion, tightened 6 basis points to 198 basis points even as bond returns fell 0.30 percent, the benchmark J.P. Morgan's EMBI+ index showed.
"The US jobs data for this month was really low but there were revisions for the past three months which were very high," said Siobhan Morden, Latin America strategist with ABN Amro in New York.
"As a result, Treasury yields are spiking higher, basically lowering the risks of recession and a rate cut. That reduces risk aversion in general and that should be beneficial to emerging markets overall," she added. Emerging debt prices mostly resisted the Treasury sell-off, with Brazil's global bond due in 2040, the most liquid paper of its asset class, declining 0.437 point to bid 130.688.
"I wouldn't give an exaggerated relevance to today's jobs data. Different markets had different interpretations for that and the impact on emerging bonds was limited," said Diego Beleza, sovereign debt analyst with Prosper bank in Rio de Janeiro. He also said trading volumes were very thin as US bond markets will be closed on Monday for Columbus Day.