Emerging-Market Bonds Tumble

[HenryTo]

Like the article said, the continued appetite for risk has been showing up in the emerging market bonds as well as in stocks. Steel and homebuilding stocks continue to tumble today - and they are still overbought in the intermediate term. Question is: When will the "legitimate reversal" of such cyclical and risky assets finally arrive?
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Emerging-Market Bonds Tumble on Concern Yield Advantage to Wane

March 9 (Bloomberg) -- Emerging-market bonds tumbled, led by Brazil and South Africa, on concern higher yields in the U.S. will reduce the attractiveness of developing-nation debt.

JPMorgan Chase & Co.'s benchmark emerging-market index was headed for its biggest decline in 14 weeks as higher oil and gasoline prices increased concern U.S. inflation will accelerate, sending 10-year Treasury yields to above 4.42 percent, the top of a seven-month trading range. South Africa's benchmark 13.5 percent bond due 2015 dropped for a second day, boosting the yield to 8.06 percent, according to JPMorgan.

``U.S. rates going up are a bad thing for emerging markets,'' said John Peta, who manages about $400 million of debt, including Brazilian and South African bonds, at Standish Mellon Asset Management in Boston. ``If rates go higher, certainly emerging market debt is going to suffer from it.''

Investors anticipate higher U.S. interest rates will pull funds from emerging-markets, where the perception of risk is higher, said Stuart Schweitzer, global markets strategist at JPMorgan Private Bank, which oversees $266 billion of global assets. JPMorgan's EMBI+ emerging-market debt index has gained 26 percent from an eight-month low May 10. The 10-year U.S. Treasury note has lost 7.1 percent in the same period.

The U.S. Federal Reserve probably will raise the benchmark lending rate to 4 percent this year from 2.5 percent, Schweitzer said at a press conference in Sao Paulo.

`Pressure'

``As they do so, investors' appetite for risk is likely to diminish,'' Schweitzer said. ``I expect that emerging market debt and equity as asset classes may come under some pressure in months ahead.''

Demand for U.S. government debt waned for a second day on speculation rising consumer prices will erode returns on fixed- income assets. The benchmark 4 percent note due in February 2015 declined about 7/8, or $8.75 per $1,000 face amount, to 96 1/32 at 2:24 p.m. in New York, according to bond broker Cantor Fitzgerald LP.

JPMorgan's index fell 0.8 percent, the biggest decline since Nov. 29, to 335.08 points. The average extra yield investors demand for emerging-market debt over comparable U.S. The average difference in yield between the 18 countries' bond in the index and U.S. Treasuries with a comparable maturity rose 0.01 percentage point to 3.31 percentage points.

Yields on U.S. Treasuries aren't high enough to cause investors to flee Latin American debt markets, said Carlos Olivares, who helps manage $9.8 billion in Santiago at AFP Cuprum SA, Chile's third-biggest pension fund.

`Still Attractive'

``It's still very attractive to invest in emerging markets, including at this level of U.S. rates,'' said Olivares by telephone. ``Today it was more of an opportunity to buy than sell.''

Inflation is slowing in Latin America and governments are reducing budget deficits, making regional economies attractive, he said. ``You prefer to take a bit more risk and have a bit more yield and a bit more spread,'' Olivares said. ``Emerging markets continue to be very good.''

Brazil's benchmark 10.5 percent bond maturing in 2014 fell 1.75 cents to 117.5 offered to yield 7.82 percent. South Africa's benchmark 13.5 percent bond maturing in 2015 fell 1.57 cents to 138.06 offered, its second straight decline, to yield 8.06 percent.

The extra yield investors demand for a 10-year Brazilian bond has dropped to 3.6 percentage points from more than 6 points in August last year.

Since June, the Federal Reserve has raised its benchmark interest rate six times to 2.5 percent from 1 percent. Higher U.S. rates are unlikely to prompt a sudden outflow of investment because economic growth remains in Latin America remains strong, Peta said.

Brazil's government forecasts the economy will expand 4 percent this year after 5.2 percent growth last year.

``If rates rise gradually the impact should be small,'' Peta said. ``Countries like Turkey and Brazil have shown they

[HenryTo]

The Bank Credit Analyst on Emerging Market Equities:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20050317.GIF

A very timely article!

[HenryTo]

Emerging markets getting killed again:
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Emerging Market Stocks, Bonds, Currencies Fall on Risk Concerns

March 16 (Bloomberg) -- Emerging market stocks, bonds and currencies, among the world's best performers this year, fell as rising U.S. interest rates and General Motors Corp.'s warning of a first-quarter loss reduced investors' willingness to take risk.

The CECE index of 25 companies traded in Central Europe headed for its steepest drop since September 2002, led by a tumble in Czech stocks. Currencies from Mexico to Turkey fell and Brazil's benchmark bond due 2040 dropped to a four-month low before recovering.

``We're experiencing a bit of a sell-off and risk aversion across emerging markets,'' said Michael Ellis, a member of a team that manages about $500 million in developing-nation debt, including Brazilian bonds, at Standard Bank London Ltd. in London.

The declines were sparked by Detroit-based GM's forecast of its largest quarterly loss since 1992, reducing the appetite for riskier investments in developing nations, said Alia Yousuf, who manages $300 million in emerging market bonds at First State Investments in London. The warning added to concern that higher U.S. interest rates will make it more expensive for emerging- market nations to borrow on international markets.

Higher U.S. Rates

``The concerns are that as U.S. rates go higher there will be liquidity problems for emerging market borrowers, who have had an easy time so far raising money to meet requirements,'' said Christian Stracke, head of emerging markets fixed-income research at CreditSights Inc. in New York. ``This won't create a debt crisis, but it raises risk.''

The yield on the U.S. 10-year benchmark Treasury note, which moves inversely to its price, has risen 0.60 percentage point since its lowest of the year, reached Feb. 9, amid speculation the U.S. Federal Reserve will add to the six interest-rate increases implemented since June 30. Ten-year notes had their biggest weekly drop since May in the five days ending March 11, as oil prices rose near a record and other commodity prices surged.

Crude oil rose today after a government report showed that gasoline inventories fell more than expected last week.

Oil for April delivery rose 25 cents, or 0.5 percent, to $55.30 a barrel at 10:33 a.m. on the New York Mercantile Exchange.

Some Fed policy makers said low interest rates may be ``contributing to signs of potentially excessive risk-taking in financial markets,'' minutes from the central bank's December meeting showed.

U.S. corporate bonds also fell after the GM announcement and U.S. Treasuries rose.

U.S. Market

The benchmark 4 percent Treasury note due in February 2015 rose 1/2, or $5 per $1,000 face amount, to 96 3/16 at 10:45 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield declined 7 basis points, or 0.07 percentage point, to 4.48 percent. Yields on two-year notes fell for the first day in eight, dropping 8 basis points to 3.65 percent.

The average spread for investment-grade company bonds widened 1 basis point yesterday to 80 basis points, the widest since March 3, according to a Merrill Lynch index. The number had been 79 since March 3, the narrowest since August 1998 and t he number was 95 a year ago.

Average spreads on emerging-market debt widened for the fifth day in six today, gaining almost 0.07 percent point to 3.66 percentage points, according to JPMorgan Chase & Co.'s EMBI+ Index. On March 8, investors demanded on average 3.3 percentage point extra yield for emerging market bonds over comparable maturity U.S. Treasuries, the narrowest spread ever.

``We had a fantastic rally in all spread products and now things like GM spooked markets a bit,'' said Edwin Gutierrez, who manages $1.6 billion in emerging market debt at Deutsche Asset Management in London.

Hungary

Hungary's benchmark stock index fell the most since January 1999, dropping lost 6.7 percent, the biggest fluctuation today among equity markets valued at more than $10 billion. The CECE Traded Index, a benchmark for Central Europe, lost 5.2 percent, the sharpest drop in more than three years.

Czech bonds led the decline in Eastern European government debt, with the yield on the 10-year benchmark note advancing 13 basis points to 3.84 percent.

``People are now looking to U.S. investments rather than Eastern European assets,'' said Piotr Pazio, a debt trader in Warsaw at Bank BPH SA, Poland's third-biggest lender. ``U.S. yields are looking attractive.''

In Latin America, Brazil's 10.5 percent 10-year bond fell 1.85 cents on the dollar to 111.50, pushing its yield up to 8.67 percent, according to JPMorgan Chase & Co. Venezuela's 9.5 percent bond that matures in 2027 fell 0.55 cents on the dollar to 100.90, pushing the yield up to 9.16 percent.

The top 10 biggest currency decliners against the U.S. dollar today are all in emerging markets. The Slovak koruna had the biggest drop of all the Eastern European currencies, while Argentina's peso led Latin American currencies lower.

Slovakia

``The Slovak koruna has now been caught up in the drop seen across Eastern European currencies,'' said Jon Harrison, a currency strategist at Dresdner Kleinwort Wasserstein in London. ``Investors have been buying the koruna as a one-way bet for some time, assuming it wouldn't weaken. Once sentiment in the region shifts, that's not enough to support the currency.''

Against the dollar, the Slovak koruna fell 1 percent to 28.77, from 28.53 late yesterday. Argentina's peso fell 0.2 percent to 2.9220 per U.S. dollar, from 2.9160 yesterday.

The Polish zloty declined to 4.08 per euro, from 4.05 late yesterday. The Hungarian forint fell to 246.51 per euro in Budapest, from 245.79.

The Swiss franc, considered by investors as a save haven, was the world's best performer against the dollar today among 60 tracked by Bloomberg, gaining 1.1 percent.

To contact the reporters on this story:
Andrew J. Barden in Buenos Aires at barden@bloomberg.net

To contact the editor responsible for this story:
Laura Zelenko at lzelenko@bloomberg.net