Emerging debt-Spreads tighter; Brazil, Mexico local rates rise

By Walter Brandimarte

NEW YORK, June 9 (Reuters) - Emerging sovereign debt spreads tightened on Monday in a languid market, but local rates rose in Brazil and Mexico on the back of growing inflation concerns.

Low trading volumes on the international debt market helped high-yielding bonds outperform a sell-off in U.S. Treasuries. As a result, yield spreads between the two asset classes tightened 4 basis points to 250 basis points, according to the benchmark JPMorgan EMBI+ index 11EMJ .JPMEMBIPLUS.

"The market is too slow. Only some trading on the Brazilian bonds due 2016, 2037 and 2040," said Leandro Britto, emerging markets desk manager at Arkhe brokerage in Sao Paulo.

Brazil's global bond due 2040 BRAGLB40=RR, the most liquid emerging market paper, saw prices declining 0.625 point to bid at 134.750.

Argentina's risk spreads narrowed 13 basis points to 534 basis points on the EMBI+ after farmers lifted their third strike in as many months over a tax hike on grain exports. For details, see [ID:nN09260924]

Most of the day's action took place in domestic markets, with investors adjusting expectations for further monetary policy tightening in Brazil and a possible rate hike in Mexico.

Brazil's interest-rate contract maturing in January 2010 <0#2DIJ:>, the most liquid at the country's Commodities and Futures Exchange, jumped to 14.76 percent from 14.58 percent on Friday's close.

The sharp move followed a weekly central bank report that showed investors marking up their 2008 forecasts for inflation and the benchmark Selic rate. Investors now expect Brazil to close 2008 with an inflation rate of 5.55 percent, up from the 5.48 percent forecast one week ago.

The Selic rate, currently at 12.25 percent, is now seen at 14 percent by the end of the year, up from the previous forecast of 13.75 percent, according to the central bank poll.

Inflation fears also drove yields on Mexico's 10-year bonds MX10YT=RR to a 22-month high of 8.51 percent, 11 basis points higher than Friday's close.

Mexico's consumer prices rose 4.95 percent in the 12 months through May, following an annual inflation rate of 4.55 percent in April, according to the central bank. [ID:nN09466711]

"Trend inflation continues to increase in Mexico, mostly reflecting higher commodity prices, in our view," Barclays Capital's analysts wrote in a research note, forecasting the central bank will increase overnight interest rates by 25 basis points in July 18.

According to the bank, there is also some probability that such a rate hike would come "as early as this month."

The exception in the region was Colombia, which saw its local rates falling after the government said it will cut its 2009 budget proposal by $5.9 billion, in an effort to control the strengthening of the peso. [ID:nN09465647]

The plan, aimed at reducing Colombia's fiscal deficit to 3 percent of GDP, would also lessen inflationary pressures, relieving part of the pressure on policymakers to raise interest rates.

The yield on Colombia's benchmark bond due July 2020 CO240720F=SENC declined to 11.80 percent from Friday's close of 11.864 percent.