Turkey bonds fade after strong open; Mogo prices €50 million deal; selloff hits EM debt

By Rebecca Melvin

New York, June 25 – Turkey’s bonds faded back after a strong open on Monday in the wake of results showing that President Recep Tayyip Erdogan won that country’s presidential election on Sunday and his AK Party retained control of parliament.

The drop back was “not a surprise given the amazing rip we saw to finish off last week,” a London-based trader said of the bonds.

Also on Monday, Mogo Finance SA and its group companies priced a small issue of €50 million of notes due 2022 at par to yield 9˝%. The subsidiary of AS Mogo, the Latvia-based used-car financing company, had announced at the beginning of May that it was planning to price up to €75 million of notes.

But overall Monday was dominated by fear bringing out mostly sellers in the secondary market and a quiet primary as global stocks sank while Treasury bonds gained in the broader markets.

Bahrain’s sovereign curve was a significant underperformer in emerging markets debt. Spreads on the debt of the Gulf Cooperation Council-member blew out by more than 150 basis points for its two shortest-dated notes and by 120 bps for its 5 7/8% notes due 2021, according to a market source. Bahrain’s longer end fared better, but only in comparison to the carnage in its short end, with spreads there wider by 60 to 70 bps for the most part.

Meanwhile, Argentina was something of an outperformer, “doing better than the rest,” according to a New York-based trader, despite a 24-hour union strike underway in the country.

Back in the broader markets, Japan’s Nikkei 225 index fell nearly 1%, Europe’s Stoxx 600 closed off 2%, as did the U.K. FTSE 100, while U.S. stock indexes were down sharply but settled off their lows for the day. The tech-heavy Nasdaq stock index fell 2%, while the S&P 500 stock index ended down 1.3%.

The CBOE Volatility index, which measures the stock market’s expectation of volatility implied by S&P 500 index options, spiked more than five points, or 38% intraday, its highest level since early April, as fears of escalating trade conflict shook investors. But it closed higher by 3.6 points, or 26%, at 17.33.

Sparking the moves was news that the U.S. Treasury Department is drafting curbs that would block firms with at least 25% Chinese ownership from buying U.S. technology firms. But later in the day the White House pulled back from the reports of blocking technology trade, and the markets recovered somewhat into the close.

U.S. Treasury Secretary Steven Mnuchin said the restrictions will not be specific to China and would apply to all countries “that are trying to steal our technology.”

Investors bought long-dated U.S. Treasuries, sending yields down and flattening the yield curve to its lowest level in more than 10 year. The yield on the Treasury 10-year benchmark fell to 2.880% from 2.900% on Friday. The yield curve between two-year and 10-year notes flattened to 33 bps, the lowest level since 2007.

Turkey weaker with Erdogan win

The Turkey 6 1/8% notes due 2028 were about 93.44, which was off 0.2% on the day but close to their high of 93.6 in recent sessions, after news that Erdogan, a vocal opponent of raising the country’s interest rates, had won his second term and the AKP retained its parliamentary majority.

Turkey’s five-year sovereign credit default swaps tightened by 25 bps to 275 bps.

The Turkish lira, which also opened strongly, climbed back to around 4.69 on Monday. That was only slightly weaker compared to a level around 4.68 on Friday.

Assets weakened after a strong open, a trader said, pointing to “sell on the news” trading. And while there may be some continued consolidation in the short term, it is likely to be a “gentle grind tighter,” the trader said.

Although the expectation is for continued headwinds in Turkey under another Erdogan term, it is “a slow-moving car crash and one that EM investors have navigated for years,” the trader said.

Erdogan has ruled Turkey for 15 years and election officials said he won an “absolute majority” on Sunday although official results will not be available until later in the week

Erdogan has stood against high interest rates, calling such rates “the mother and father of all evils.” The stance raised concerns in financial markets s that he may try to prevent the country’s central bank from supporting the currency. The central bank has raised rates twice this year as the lira dropped on fears Erdogan was not allowing the central bank to act independently.

© 2015 Prospect News.
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