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. Last Updated: 07/27/2016

Braced for Brazil Storm

This time investors were better prepared to absorb the shock. In contrast to the aftermath of Russia's collapse in August, the initial flight to safety that followed the Brazilian currency devaluation Wednesday did not turn to panic in U.S. stock and bond markets. Big bettors learned their lesson: Fool me once, shame on you. Fool me twice, shame on me. Bond prices soared as soon as Brazil announced its devaluation; investors rushed to the immediate safety of the treasury market. But bonds gave up much of their gain by the day's end, with the price of the 30-year treasury bond rising 1 6/32 to 101 28/32 and the yield, which moves in the opposite direction, moving down to 5.13 percent, from 5.20 percent Tuesday.

In the corporate bond market, which literally froze up after the Russian collapse, big-name bonds rallied to trim their early losses by the end of the day. There was even time for joking on trading floors once the U.S. stock market began to recover. "How does Brazil solve its problems?'' ran the big question of the day. The answer: "Change its name to, and it can take off like the Internet stocks."

When Russia suddenly devalued its currency and effectively defaulted on its debt in mid-August, investors around the world were stunned. Many refused to believe the United States and the International Monetary Fund would allow Russia to collapse until it actually happened.

But with that experience still fresh in the memories of market participants, Brazil's policy reversal - which stopped far short of full-scale devaluation and default - did not come as much of a surprise.

"A major lesson learned last summer was that there could be default on sovereign debt," said Denis Adler, the corporate bond strategist at Salomon Smith Barney. "People had forgotten that and discounted it as a risk then."

Meanwhile, investors have become much more risk averse, moving away from markets that they think are vulnerable. They are no longer borrowing so much, either, to make big bets - known on Wall street as leveraging. That means they are not as vulnerable to outsized losses and panic selling to cover their loans. This kind of leverage was also at the heart of the near collapse of Long-Term Capital Management, the hedge fund whose losses spooked investors in September.

"Timing is very important," said Lawrence Brainard, the global head of emerging market research at Chase Securities. "The markets have had time to reduce leverage and exposure."

Jim Claire, the head of the taxable fixed income trading desk at FirstCapital Group in Charlotte, North Carolina, said: "Everyone is saying it is not the end of the world. We have been down this road before."

Russia's collapse sent investors fleeing to the U.S. Treasury market, pushing the yield on the 30-year bond down to 4.72 percent in early October. The fear of any risk effectively froze trading in the corporate and high-yield junk bond markets and even hindered the trading of older treasury securities.

In response, the Federal Reserve, fearing that the smooth functioning of the world's financial system was threatened, cut its interest-rate target three times.

The Russian debacle also forced many money managers to sell profitable holdings they would normally have kept just because they had to offset huge losses in emerging markets like Russia, where selling was difficult.

Another factor that could contain the contagion this time is that there are very different players at the center of the trading action.

In Russia, many of the losing bets were made by hedge funds that had put far too many of their investment eggs in one basket, forcing them to sell quickly. In Brazil, the big U.S. and foreign banks are the main players in the currency market. They are bigger, more diversified and there is less pressure to sell, according to one executive at a major bank. And these institutions, after Russia, have trimmed their investments in Brazil and Latin America to lessen their risk.

Of course, the situation is still delicate and the news from Brazil is far from positive for many investors. Uncertainty over what will happen next in Brazil is bound to hang over world financial markets for some time.

The cost of emerging market debt rose sharply Wednesday, although it, too, rallied a little by the end of the day. The J.P. Morgan emerging market bond index, which shows the difference in the yield countries must pay to sell emerging market bonds and the yield on comparable U.S. Treasury securities, jumped to 14.26 percentage points Wednesday. It is still below its peak of 17.05 percentage points in September but above its recent low of 9.44 percent in November.

Many of the problems in Brazil and other emerging markets "are still with us," said Desmond Lachman, the director of emerging markets economic research at Salomon Smith Barney. He argued that Brazil still had the potential to roil world markets.

And Arturo Porzecanski, chief economist for the Americas at ING Barings, was worried that other shoes might still drop. The devaluation, he suggested, may be "too little and may be too soon.''

"The other parts of the program are not in place yet," he said. For all the nagging fears of the future, though, the reaction of American financial markets Wednesday shows that the system is not as vulnerable to bad news as it was last August.

Jonathan Fuerbringer contributed this comment to The New York Times.