WEEKEAHEAD-Emerging debt to remain volatile after selloff
NEW YORK, July 29 (Reuters) - Emerging sovereign debt markets should eventually rebound from Thursday's subprime-related meltdown but it might be too early to call a bottom this week.
Despite the massive sell-off that left bonds with losses of more than 1 percent for the year-to-date, dedicated emerging market investors have not yet capitulated, but are possibly waiting for an opportunity to buy on dips, fund managers and analysts said.
"Although real-money accounts are obviously also feeling the pain, they still believe that at some point this will be an opportunity to add (risk)," JP Morgan's analysts wrote in a research note.
"So long as the subprime turmoil does not translate into a marked U.S. slowdown, correction should eventually prove a buying opportunity," they concluded.
With that in mind, investors will monitor important U.S. jobs figures and manufacturing data this week to gauge the strength of the world's largest economy.
Emerging debt spreads over U.S. Treasury notes, a key gauge of risk aversion, widened 30 basis points only on Thursday, to a one-year wide of 226 basis points, according to the benchmark JP Morgan EMBI+ index 11EMJ.
The market tried to recover on Friday, but fears that the U.S. subprime mortgage crisis will keep contaminating other credit markets curbed gains. Risk spreads finished Friday at 223 basis points, 43 basis points wider for the week, the EMBI+ showed.
CDS contracts, which measure the cost of insuring a country's debt against the risk of default, also soared. Brazil's five-year CDS contract BRAZIL5UA=GFI closed Friday at 150 basis points, 67 basis points wider for the week.
Most of the action was a result of non-dedicated emerging market investors buying CDS protection in order to hedge their positions, a trend analysts believe may continue for days.
As a result, analysts foresee a good deal of turbulence ahead, but many of them say stronger emerging market fundamentals will eventually prevail.
"Although emerging markets are likely to see further short-term pain if the re-pricing of global credit markets deepens, we believe that this may only prove transitory," RBC Capital's analysts wrote in a research note.
"Eventually investors will again see long-term value in emerging markets, given strong fundamentals underpinned by healthy balance sheets and ample cash reserves," they added.
