Emerging sovereign debt spreads widened on Friday as fears related to the US subprime mortgage market hit risky assets globally, causing some investors to look for safety in US Treasuries.
Emerging markets stocks and currencies were harder hit, while bond returns slid a more modest 0.15 percent on the benchmark J.P. Morgan's EMBI+, their third consecutive session of losses.
Yield spreads between emerging markets debt and US Treasury notes widened 5 basis points to 160 basis points, according to the EMBI+, in a sign that investors became a little more cautious toward the asset class.
"Maybe we are back into that flight to quality dynamic where equities are weaker and Treasuries are recovering," said Siobhan Morden, Latin American strategist with ABN Amro in New York. "And that seems to be the case, because Treasuries are stronger and all the risky assets are weaker today."
Emerging markets have been jittery since Thursday on news that two hedge funds managed by Bear Stearns had billions of dollars in losses from bad bets on securities backed by subprime mortgages. Some investors fear that those losses could spill over into the whole credit market.
High-beta credits like Argentina, Ecuador and Venezuela, which usually exacerbate market movements, suffered the largest losses. Argentina's bond returns slipped 1.01 percent, while Ecuador and Venezuela declined 0.68 percent and 0.30 percent, respectively.
Brazil's external bonds outperformed the market, with the benchmark global bond due 2040 losing only 0.062 point in price to be bid 131.063. Brazilian local markets posted larger losses, though. Interest-rate futures rose across the board at the Brazilian Commodities and Futures Exchange, with the liquid contract maturing in January 2010 jumping to 10.56 percent from 10.42 percent.
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