The 25 basis point interest-rate rise in the U.S. prompted emerging-market sovereigns' credit spreads to jump. Credit investors getting nervous about the direction of U.S. rates started buying protection on sovereigns, including Brazil, Turkey, Venezuela and Argentina. Credit-default swap traders also attributed a weakening Turkish lira and a recent sell-off in commodities with stirring up market unease.
Last Tuesday, the price of protection on Turkey jumped to 180 bps from 132 bps two weeks prior, while Brazil blew out 50 basis points from 120 bps late last week. "That's quite a significant move over a couple of days," said one London-based trader. He noted most local rate players use the U.S. dollar as their benchmark, which is why protection buying was so rigorous.
Spreads had regressed slightly as DW went to press--Turkey protection was at 174 bps Wednesday and Brazil at 160 bps. Officials attributed tightening to the release of encouraging U.S. data, including a rise in April producer prices. Traders were divided on where spreads would head next, but all agreed volatility will be high. "We are in for a period of high volatility," said a trader.
