Thursday, August 16, 2007

Emerging-Market Bonds Fall as Investors Avoid Riskier Assets

From Bloomberg Today:

Emerging-Market Bonds Fall as Investors Avoid Riskier Assets

By Lester Pimentel

Aug. 15 (Bloomberg) -- Emerging-market bonds fell, pushing yields over U.S. Treasuries to the widest in more than two weeks, as growing concern about subprime mortgage losses sapped demand for riskier securities.

``There's risk reduction across the board,'' said Roberto Sanchez-Dahl, who manages $500 million of emerging-market bonds for Federated Investment Management in Pittsburgh. ``We have more to come from the U.S. mortgage market, and subprime is going to continue spreading to other markets. We definitely think it's not over.''

The spread, or extra yield, on emerging-market bonds over U.S. Treasuries widened 8 basis points, or 0.08 percentage point, to 2.23 percentage points at 4:05 p.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index. The risk premium is the biggest since July 27.

Rising speculation the housing sector's woes are spreading to other markets has triggered a selloff in high-risk assets such as developing nation debt and global stocks over the last month. The S&P 500 dropped 1.29 percent, while the Dow Jones Industrial Average retreated 1.39 percent.

Venezuelan and Argentine bonds posted today's biggest declines. The yield on Venezuela's benchmark 9 1/4 percent bonds due September 2027 rose 41 basis points to 9.31 percent, according to JPMorgan. The bond's price fell 3.75 cents on the dollar to 99.45 cents. The average spread on Venezuelan dollar debt expanded 37 basis points to 4.16 percentage points over U.S. Treasuries, the widest gap since Aug. 31, 2005.

Argentina, Brazil

The extra yield investors demand to hold Argentine bonds also jumped 26 basis points to 4.86 percentage points more than U.S. Treasuries. The yield on the country's 8.28 percent securities maturing in 2033 increased 29 basis points to 10.20 percent. The bond's price declined 2.50 cents on the dollar to 81 cents, tying a record low set two days after the securities were issued as part of Argentina's restructuring of defaulted debt on Dec. 19, 2005.

The risk of owning Brazilian bonds increased to the highest since July 31, according to data from Lehman Brothers Holdings Inc. Five-year credit-default swaps based on $10 million of Brazil's debt, a proxy for emerging-market risk, rose to $135,500 from $123,000 yesterday. An increase in price suggests a deterioration of perceived credit quality.

Credit default swaps for Argentina and Venezuela also increased. The cost of protecting Argentine debt against default rose to a record $505,500 from $442,500 yesterday. Swaps based on Venezuelan debt climbed by $57,500 to $455,000, also a record.

Venezuelan Growth

Venezuela's economy in the second quarter expanded at the slowest pace in two years, cooled by a decline in the oil industry and a pullback in the growth of government spending.

Gross domestic product expanded 8.9 percent, down from a revised 9.1 percent in the first quarter and 9.4 percent in the same quarter a year earlier, the central bank said today in an e- mailed statement.

Venezuela's total exports fell 8.2 percent to $16.8 billion in the second quarter from $18.3 billion a year earlier. Imports rose 38 percent to a record $10.9 billion.

The current account surplus plunged 40 percent to $5.1 billion, the bank said.

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