Emerging markets were mixed on Friday, getting a modicum of support from slightly stronger US stocks but undercut by weak commodities and a sharp drop in US Treasuries. Latin American currencies weakened against a broadly stronger US dollar after American jobs data showed fewer people were newly unemployed last month, boosting hopes for an economic recovery.
MSCI's Latin American stock index fell 0.38 percent but the broader MSCI emerging markets stock index climbed 0.67 percent on Friday. Yield spreads between US Treasuries and emerging market sovereign bonds tightened however as a result of investors dumping the safe-haven asset on concerns the better jobs report would prompt the US Federal Reserve to consider raising interest rates.
The J.P Morgan Emerging Markets Bond Index Plus narrowed by 11 basis points to 419 basis points over US Treasuries. The benchmark 10-year US Treasury yield nudged up to the 3.85 percent area.
"It has been building for a couple of weeks now. LatAm has been avoiding coming to the crude truth of higher (US) Treasury yields. It has been too caught up in the recovery and high commodity price landscape that has been reigning in Latin America," said Enrique Alvarez, head of Latin American debt strategy at IDEAglobal in New York. Alvarez says Latin American debt prices may have hit a peak and are now adjusting to higher US Treasury rates, he said.
Among benchmark issues, Brazil's 2040 Global bond fell 0.38 points in price to bid 129.063, yielding 5.407 percent. Even as there are elements of economic recovery in data from the US and elsewhere, interest rates in emerging markets continue to decline. The latest Reuters poll of economists expects Brazil to cut its benchmark Selic interest rate to a record low of 9.50 percent on June 10.
The government's expected 75 basis point cut in borrowing costs would be its latest effort to nurture economic growth amid the global recession. Peru continued to take an axe to its interest rate levels, cutting 100 basis points off its benchmark rate to 3 percent. This marks the fifth straight monthly reduction in rates.
BullTick Capital Markets senior emerging market macroeconomic strategist, Kathryn Rooney wrote on Friday the firm expects Peruvian inflation to fall within the 1-3 percent target range this year due to lower food and metals prices.