New York: Emerging-market bonds slid on Thursday, pushing yields over US treasurys to the widest since October, as investors reduced their holdings of riskier securities.
Developing-nation debt has declined for five days as growing losses in so-called collateralized debt obligations backed by subprime mortgages triggers risk aversion. Argentine and Venezuelan bonds, among the riskiest in emerging markets, led losses.
“The declines are spilling out from the global story centered on CDOs and the subprime market,” said Michael Atkin, head of sovereign research in Boston at Putnam Investments. “It’s not a story that has originated in emerging markets. We’re trading in lock-step with the move in risky assets.”
The spread, or extra yield, on emerging-market bonds over US treasurys widened 14 basis points to 2.10 percentage points at 9.35am in New York, according to JPMorgan Chase & Co.’s EMBI Plus index. A basis point is 0.01 percentage point.
The risk premium is the highest since 4 October.
Argentine bonds plunged today, extending a streak of losses that began on 12 July. The yield on the 8.28% dollar securities jumped 49 basis points to 9.74%, according to JPMorgan. The bond’s price, which moves inversely to the yield, tumbled 4.60 cents on the dollar to 85 cents, the lowest since 28 June 2006. The average spread on all of Argentina’s dollar bonds surged 35 basis points to 4.37 percentage points more than US Treasuries, the biggest gap since 31 January 2006.
The resignation of Argentina’s National Statistics Institute chief on Wednesday also hurt the bonds. Alejandro Barrios resigned after three months in office amid protests by agency employees and criticism by outsiders that government inflation data has lost credibility.
Venezuelan bonds also fell, with the spread on the country’s debt jumping 21 basis points to 3.51 percentage points more than US treasurys, the biggest yield difference since 16 September 2005.
The perceived risk of owning Brazilian bonds, the most widely held emerging-market security, soared to the highest since 6 October, 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, jumped to $125,000 from $96,500 on Wednesday.
An increase in price suggests a perceived deterioration of credit quality. Credit default swaps for Argentina and Venezuela also rose. The cost of protecting Argentine debt against default increased to $380,000, the highest since Lehman began tracking it in January 2006. Credit default swaps based on Venezuelan bonds also rose to a record $359,500 from $309,500 on Wednesday.