NEW YORK, Aug 6 (IFR) - Brazilian debt prices took another sharp leg down on Thursday as fears intensified that the sovereign will be demoted to junk-rated territory.
Faith in Brazil's ability to get its fiscal house in order is fading as the popularity of President Dilma Rousseff plummets in the polls and Congress resists spending cuts.
The latter problem was brought to the fore following passage of a bill in the lower house Wednesday to raise wages for some public employees and police officers.
Against that backdrop, speculation has been growing that Moody's may downgrade the sovereign by two notches to junk, instead of one notch to Baa3 as had earlier been expected.
Those concerns unnerved the market today, sending corporate and sovereign bond spreads wider by another 20bp-50bp.
"It is a disaster," one trader told IFR. "It is utter capitulation from real money."
Petrobras 2024s were being quoted at 563bp-553bp, while the state-owned oil company's Century bond was trading around 615bp-605bp over.
In mid-July, those securities were trading at 433bp-423bp and 515bp-510bp, respectively.
"Everyone had been preparing for weak earnings from Petrobras, but we had been pricing that in all this week," the trader said. It was expected to report after Thursday's close.
Poor earnings expectations have also left telecoms company Oi's bonds plummeting about three to four points this week in what is already a tough market for Brazilian credits.
Its 2020 is now yielding mid-11%, said the trader.
Larger liquid bonds have also been easy targets for investors looking to reduce exposure to the country.
This includes the 8.5% perps issued by Banco do Brasil, which are now being quoted at around 101.50-102.50.
"It is liquid and people need to hit a bid, and it is the only bid there," said another trader.
Brazil's trouble comes amid a broader re-pricing of risk in emerging markets, which are being buffeted by lower commodity prices and weaker currencies.
Oil prices hit multi-month lows on Thursday, with US crude falling 2% earlier in the session to US$44.25.
"We are seeing an interest from investors to reduce commodity-exporting sovereigns," said Michael Roche, EM fixed-income analyst at the Seaport Group. (Reporting by Paul Kilby; Editing by Marc Carnegie)