Emerging sovereign debt prices fell slightly on Friday, in concert with weak global equities, as short-term investors raced to take profits ahead of the end of the third quarter.
"I don't think there is a lot of confidence. In general this week the market has had a positive tone. Probably some of the profit taking is taking place just because we have been rallying quite significantly since the Fed cut rates," said Igor Arsenin, emerging markets debt strategist at Credit Suisse in New York.
"It doesn't necessarily mean the market will remain weak next week. On the other hand there is not a lot of conviction," he said, noting that longer-term investors were putting on some new positions. Arsenin said the main point of concern is the strength of the US economy and the uncertainty over whether or not the US Federal Reserve will continue to cut rates.
Yield spreads however remained unchanged as losses tracked the drop in benchmark US Treasuries. The J.P. Morgan Emerging Markets Bond Index Plus showed yield spreads unchanged on the day at 202 basis points. For the week the EMBI+ is wider by just 6 basis points. The market narrowed roughly 44 basis points since September 10.
Investors began to buy back emerging market debt as they grew more confident the US Federal Reserve would cut interest rates to stem any damage to the broader economy from the ructions in the riskier end of the US mortgage market.
Their hunches were confirmed on September 18 when the Fed cut by a more than aggressive half of a percentage point and accelerated the rally as lower rates historically spur growth. Emerging markets benefit through bigger exports of their high-priced commodities and value added goods to America.
The benchmark US stock indices were slightly weaker as was the MSCI Latin American Stock index, which came off of Thursday's all-time high. The broader MSCI Emerging Markets stock index edged further into record territory for a third consecutive day.
The index is up 32 percent this year. Among the benchmark credits, the Brazil 2040 bond showed prices unchanged at 133.75, leaving the yield at 5.631 percent. Turkey's 2030 bond lost 0.25 points in price to bid 155.188, yielding 1.962 percent.