Emerging market debt sees sell-off during illiquid session; Turkey down

By Reshmi Basu and Paul A. Harris

New York, June 26 - Emerging market debt remained under pressure Monday, as Turkish woes continued to weigh on investor sentiment.

Monday saw a quiet opening as sovereign debt traded in tight ranges, according to a market source. But towards the end of the session, the market saw an "ugly" sell-off amid thin volumes even as U.S. equities posted positive returns.

There was little price action throughout most of Monday. Then during the last hour or so, the market saw heavy pressure.

Another source referred to the late sell-off as panic-selling as jitters over fundamentals in European and African names such as Turkey and South Africa triggered a widespread sell-off across most credits.

At session's end, Turkey's portion of the JP Morgan EMBI Global index was down 0.74% while its spread was wider by 12 basis points versus U.S. Treasuries. South Africa saw its spreads kick out by 15 basis points while the Ukraine was wider by 22 basis points.

Last week, external debt spreads widened on concerns over Turkey's sizable current account deficit and its ability to access financing in an increasingly risk averse world.

Over the weekend, Turkey's central bank raised key interest rates in hopes to quell the sliding lira. However, the emergency move did little to curb the sell-off of the country's external debt on Monday.

Emerging markets generally had a very weak session, and saw retail investors selling, according to a trader who focuses on Asia fixed income securities.

During the session, the Turkish bond due 2030 lost 1.88 to 132 bid, 132.50 offered.

The Brazilian bond due 2040 gave up 0.10 to 121.85 bid, 122.05 offered. The Argentinean bond discount bond due 2033 was down by 1.40 to 86.25 bid, 87.70 offered. And the Venezuelan bond due 2027 slipped 0.70 to 116.40 bid, 116.95 offered.

Hunkering down

The trader said that the selling was a "current accounts" story in a couple of markets, with investors looking at interest rate directions globally and also seeing certain countries that have considerable borrowing requirements, to which investors are ascribing "a much higher risk premium."

"The selling you are seeing at the moment is a risk-reduction trade," the source said, adding that credits which had been marginal out-performers are getting hit as investors anticipate further interest rate hikes.

The source cited selling of Venezuela and Turkey as examples of Monday's moves to cut risk.

"That tends to suggest that there was some real selling here," the trader asserted, adding that in a more generic market weakness scenario you expect names such as Brazil and Russia to get hit, but when the smaller names underperform it tends to point to real selling.

Some spreads were between 10 and 15 basis points wider on the session, the source added.

The source does not anticipate much primary market activity at present, citing this week's Federal Reserve meeting, beyond which the market needs to see at least three or four relatively stable sessions before issuance of any size will be seen.

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