Emerging market spreads widen on U.S. Treasuries jitters; Brazil increases Selic rate

By Reshmi Basu and Paul A. Harris

New York, March 16 - Selling in emerging market debt pushed out spreads Wednesday as the market reacted to nervousness in the U.S. Treasury market. The Brazil bond due 2040 touched a four-month low before recuperating somewhat.

Treasury yields headed lower in the early morning on a profit warning from General Motors Corp. The news sparked a rally in the U.S. government debt as investors shifted funds from equities and corporate debt. Also, high crude prices added to market jitters.

By the time trading wrapped up, the yield on the 10-year note stood at 4.51% from a session low of 4.46% and narrowed three basis points from Tuesday's close of 4.54%.

Treasury jitters continued to push down emerging market debt, as the yield on the 10-year note hovers above 4.50%.

One market source said that emerging market debt is uncomfortable with the current Treasury range, given that it looks to move higher.

During Wednesday's session, the JP Morgan EMBI+ was down 0.34% while it spread to Treasuries widened seven basis points to 366 basis points.

Individual bond prices were also down. The Brazil C bond fell 7/8 of a point to 100¼ bid. The Mexico bond due 2009 slipped 0.70 to 118.40 bid. The Venezuela bond due 2027 slid 0.90 to 100.55 bid.

The market has been "pretty much driven by fast money and the Street and it's concentrated in liquid names," said a buyside source.

"There has been a lot of selling during London hours. It seems to be a recent pattern these days: London hours - we sell off. And then New York, it consolidates a bit and towards the end of the day in New York there's another meltdown."

Brazil '40 trading negative in repo

Meanwhile, the Brazil bond due 2040 is trading at a negative rate in the repo market, an indication of how many shorts there are in the market.

One trader said during Tuesday's session the Brazil '40 reached as high as 114.90 and as low as 112.35 during heavy volume. The bond traded down to 112.45 then rose to 113 in a time frame of 15 minutes.

The trading action is a result of the repo market, in which the Brazil '40 is trading negative as the market hedges itself with '40's against long positions.

"That's why it's expensive," said the buyside source.

"It makes sense in a period like the one that we are going through. It's the most liquid instrument and the instrument of choice."

During Wednesday's session, the Brazil bond due 2040 was down 0.90 to 112 bid.

Trend in spreads is wider

Overall emerging market spreads have widened across countries because of market softness and the squeeze in short-end bond spreads.

In the last week alone, spreads have considerably widened. Brazil has seen a 43 basis points widening from March 7 to March 15. Its component of the EMBI index has fallen 3.768%.

Uruguay has also been a poor performer as its spread has blown out by 46 basis points. Its component of the EMBI index has dipped 5.794%.

Spreads for Colombia, Peru and Turkey have each widened by more than 30 basis points. Ecuador saw its spread widen by 29 basis points.

Amid widening spreads, the buyside source has not changed his strategy.

"The position we are in is that we have room to add. We are trying to weather the volatility and add on weakness," said the buyside source.

The source also added that the primary market would be on pause until the volatility subsides.

Brazil ups rates

After market close Wednesday, Brazil's central bank hiked the Selic rate for the seventh straight time by 50 basis points to 19¼% from 18¾%. The central bank set no bias for interest rate policy.

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