Emerging debt prices declined on Friday but risk spreads still tightened as high-yielding bonds outperformed US Treasuries, with investors trying to guarantee a good performance for their portfolios before year-end.
Bonds and stocks in general have been hurt in the past two days by a series of stronger-than-expected US inflation data, which reduced the likelihood of more interest rate cuts by the US Federal Reserve.
Emerging debt prices fell a little on the news, with total returns falling 0.17 percent on Friday and 0.16 percent on Thursday, according to the benchmark J.P. Morgan EMBI+ index. But yield spreads over US Treasuries, an important gauge of risk aversion, still narrowed 3 basis points to 222 basis points, on top of a 10-basis-points tightening on Thursday, the EMBI+ showed.
"Latin America at this point, at least on the debt side, is very much in the holiday mood," said Enrique Alvarez, Latin America strategist with IDEAglobal in New York. "It remains very steady, very still in front of what is going on the US side. I believe this is more than anything a case of 'don't rock the boat'," he added.
Emerging markets bonds have gained about 6.0 percent so far this year. Countries like Turkey, Brazil and Colombia have returned more than 9.0 percent. Argentina bonds remained among the largest decliners, falling 1.0 percent on Friday and 2.0 percent on the previous session, after Economy Minister Martin Lousteau said on Wednesday the government would not consider reopening its massive sovereign debt restructuring in 2005 for "hold-outs" who did not take the deal at that time.
Brazil's global bond due 2040, the most liquid emerging market paper, lost 0.438 point in price to be bid 133.250 as investors waited for the government to unveil measures to make up for the budget shortfall caused by the defeat of a key tax on bank transactions.
The so-called CPMF tax, which expires at the end of the year, accounts for almost 10 percent of Brazil's government revenue. President Luiz Inacio Lula da Silva had asked congress to extend the tax to 2011, but his proposal was rejected by the senate this week. Meanwhile, the Colombian central bank kept its benchmark interest rate unchanged at 9.5 percent, in a decision widely expected by the market.
"Given that not even the most hawkish central bank board members see an urgent need to increase the monetary restrictiveness, we believe the central bank is now likely to keep rates unchanged for a while," Goldman Sach's analyst Alberto Ramos wrote in a research note.