Emerging sovereign debt prices jump

Emerging sovereign debt prices rallied for the third consecutive session on Friday after key US prices data reduced some of the inflation concerns that were weighing on riskier markets. Brazil's global bond due in 2040, the most liquid emerging market paper, gained 0.625 points to be bid 131.563.
While overall emerging debt returns climbed 0.37 percent on the benchmark J.P. Morgan's EMBI+ index. Yield spreads between emerging markets bonds and US Treasury notes, a key gauge of risk aversion, tightened 7 basis points to 152 basis points, very close to an all-time low of 149 basis points. "The only way is up now," said Ricardo Amorim, head of Latin America Research at WestLB in New York. "We had a large technical adjustment during the past few days, prices are attractive and risks are lower now."
The EMBI+ had erased all of its 2007 gains on Tuesday, when yields on the benchmark 10-year US Treasury notes soared to a five-year high of 5.3 percent, partially due to inflation fears. Higher returns in developed economies usually reduce the attractiveness of emerging countries' assets.
But investors were more confident on Friday after the much-expected core US consumer price index came in at 0.1 percent, below expectations of 0.2 percent. However, The overall CPI jumped up 0.7 percent, above the 0.6 percent forecast by economists. Bonds that had suffered the largest losses during the recent sell-off were leading this Friday's rally. Argentina's total returns soared 2.43 percent, while Venezuelan and Ecuadoran returns were around 0.5 percent higher, the EMBI+ showed.
According to Amorim, emerging markets currencies are poised to post larger rallies, boosted by lingering carry-trade opportunities that allow investors to borrow in low-yielding currencies to invest in high-yielding assets globally.
"There is a lot of money left in the market and a lot of the carry trade has been unwound in the past few days. Now investors should build those positions again," he said.
The most liquid Latin American currencies strengthened after the CPI data, with the Colombian peso gaining around 1.3 percent. The Brazilian real was 0.7 percent stronger. The Mexican peso strengthened 0.49 percent to 10.8345 per dollar.