Emerging sovereign debt prices were mixed on Thursday after weak US economic data suggested the US Federal Reserve is not in a position to raise interest rates, but also reinforced fears about the impact of a possible US recession in developing countries.
Reaction to the data was subdued, however, because trading volumes were relatively lower in a shortened session before the July 4 US Independence Day holiday. With US employers cutting workers for the sixth straight month in June, economists say the economy is too fragile for any rate rise in the coming months. Stable US rates are likely to support the allure of higher-yielding emerging market countries and their currencies, especially those which have been tightening monetary policy to fight inflation.
"If Mr Bernanke does nothing, as we expect, rate differentials between Latin American currencies and the US dollar will continue to grow as inflation figures and expectations move uninterrupted to the upside," Enrique Alvarez, Latin America debt strategist for IDEAglobal, said in a research note. Stronger currencies would boost returns of Latin American bonds and stocks for foreign investors.
Emerging sovereign debt prices were little changed on Thursday, with the Brazilian global bond due 2040, the most liquid of its asset class, falling 0.125 point in price to bid 131.688.
Yield spreads between emerging market bonds and US Treasuries, considered an important measure of risk aversion, were nearly flat at 300 basis points, according to the benchmark J.P. Morgan EMBI+ index. Argentine and Venezuelan debt rose, however, as bargain hunters stepped into the market, traders said.
Argentina's Discount bonds due 2033 gained 1 point in price to bid 74.750, after losing 2.5 points in price during the past two sessions. Venezuela's benchmark global bond due 2027 climbed 0.875 point in price, to 94.000, supported by buyback expectations and high crude prices, which often boost the outlook of the oil-exporting country.
"Against the backdrop of solid credit fundamentals and the prospect of debt buybacks and reduced supply, we maintain our constructive view on Venezuelan credit," Barclays Capital's analyst Alejandro Grisanti wrote in a report. He recommended investors to extend duration in the Venezuelan curve, switching from the global 2013 bond into bonds due in 2023 and 2028.
Colombia's foreign bonds also gained while the country's yield spreads over US Treasuries tightened 7 basis points as investors saw news of the rescue of French-Colombian politician Ingrid Betancourt from the FARC leftist guerrillas as a very positive signal for the country.