Turkey’s lira, bonds improve, banks still lag; Argentina tighter as peso closes flattish

By Rebecca Melvin

New York, Aug. 14 – Turkey’s currency recouped about 5% and bonds improved on Tuesday, although Turkish bank debt denominated in hard currencies still lagged, and an impasse between Turkish and U.S. officials over detained American pastor Andrew Brunson continued.

On Tuesday, the lira bounced back to 6.53 to the U.S. dollar, which was an improvement from 6.9 late Monday and as low as 7.24 earlier Monday.

Meanwhile, the Argentine peso did not respond meaningfully to measures to stabilize that currency. But Argentina’s sovereign bonds saw strong spread tightening on Tuesday.

There was outperformance in Argentina’s front end with tightening of 100 basis points, while tightening in the belly of the curve was by about 50 bps and by about 40 bps in the long end, a New York-based market source said.

Spreads have not recovered the whole of widening that took place in the last several sessions, the source said. But it was a meaningful rally.

Argentina’s central bank raised its benchmark interest rates to 45% from 40% in an emergency meeting to stabilize the peso, and it also held a note auction on Tuesday, measures that took aim at a slide in the Argentine peso, which fell to nearly 30 to the U.S. dollar on Monday. The peso pulled back to 29.73 to the dollar on Tuesday.

The Argentine peso was “closing flattish to the opening of the session, while the Turkish lira recovered some losses,” the market source said. “I think the market is digesting recent announcements by the central bank and trading on the back of that. We have yet to see if the trend sustains.”

Elsewhere, there were improvements in emerging markets debt overall, a London-based trader said. But Turkish banks were notably weak. And investors will be watching other credits that are vulnerable to currency devaluation including Hungary, Poland and Chile due to high hard-currency-denominated debt levels.

A conflict between the United States and Turkey over Brunson, who is being tried in Turkey on charges that he took part in a coup attempt against President Recep Tayyip Erdogan in 2016 and supported terrorism, remains unsettled. A meeting between John Bolton, the White House national security advisor, and Serdar Kilic, Turkey’s ambassador to the United States, on Monday failed to move the needle at all, according to a Reuters report, with the United States remaining very firm on its demands and suggesting that more sanctions on Turkey could be imposed.

Meanwhile, Turkey’s Erdogan addressed a conference of the ruling party, saying that Turkey would retaliate by boycotting U.S.-made electronic goods.

Initially calls to allow Brunson to be released were met with U.S. sanctions on two Turkish ministers. Erdogan’s’ defiant rhetoric in the face of that move was met by the Trump administration doubling of tariffs on Turkish steel and aluminum imports.

Turkey was already having financial problems as it suffered as part of the emerging market to the U.S. Federal Reserve’s unwind of accommodation and rate increases, which buoyed strength in the U.S. dollar.

Meanwhile the Turkish sovereign and well as corporates including banks have taken on a lot of hard currency debt in the last few years that in the face of the strengthening dollar is looking more and more difficult to shoulder.

There was also selling in European assets tied to Turkish banks on Monday. Turkiye Garanti Bankasi AS is 49.9% owned by Spain’s BBVA, and Yapi ve Kredi Bankasi AS is indirectly 40% owned by Italy’s Unicredit.

Among some of the hardest hit credits in the selloff that started on Friday are Garanti and Yapi as well as Akbank Turk AS, Turkiye IS Bankasi and Export Credit Bank of Turkey, a trader said.

But on Tuesday, Akbank’s 7.2% notes due 2027 were slightly firmer, quoted at 58.60 bid, 60.10 offered, compared to 58 bid late Monday but down from 68½ early Monday. The bonds gapped lower through last week after having traded at the end of July at about 85.

IS Bankasi’s dollar bond maturing in October was yielding 17.9% on Tuesday, which is up from 5.3% about a week ago.

Intraday credit default swap levels for five-year debt of Turkey’s government were at 579 bps on Monday up from 449 bps on Friday.

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