Turkey improves on central bank’s policy switch, but most of EM debt roiled by rates swing

By Rebecca Melvin

New York, May 29 – Turkey outperformed in the Central & Eastern Europe Middle East and Africa region on Tuesday after that nation’s central bank moved to simplify rates to protect the lira. But emerging market debt overall was under pressure as investors sold Italian and Spanish bonds and sought save havens like U.S. Treasuries, which saw a sharp pullback in yields.

The Central Bank of the Republic of Turkey said on Monday that it is completing a simplification of its monetary policy by setting the one-week repo rate as the policy rate, which will be equal to the current funding rate, to be set at 16½% as of June 1.

The lira gained more than 3% against the dollar to 4.6070 following the announcement, from 4.7052 on Friday.

Turkey’s sovereign curve was called 5 to 10 basis points tighter on the day.

Turkey’s 6 1/8% notes due 2028 were up 1.4 points at 96.285. Credit default swaps were about 15 bps tighter for five-year protection. The CDS were now at about 245 to 250 bps, from 300 bps last week.

“It is recovering, but it still has a long way to go,” a London-based market source said.

The rest of the CEEMEA region was mostly weaker, with the spreads of low-beta names wider by only 3 to 5 bps, while the spreads of many higher-beta names were wider by three to 13 bps, a London-based trader said.

The market was described as “tricky,” after a rate swing in the face of weakness in the euro zone’s Italian and Spanish bonds.

Cash prices were adjusting to the benchmark U.S. Treasury 10 year notes at 2.8%, the trader said. Later, the yield on the 10-year Treasury was at 2.78%

Bahrain was an underperformer again, and Tunisia was wider by 15 to 20 bps, struggling after Fitch Ratings revised its outlook on the sovereign’s long-term foreign-currency issuer default rating to negative from stable, but affirmed its rating at B+.

Fitch said the move was prompted by high and growing public and external debt, subdued economic growth and sluggish reform momentum against a background of social and political tensions. But Tunisia balances these negatives against strong structural features relative to B peers, including high GDP per capita and governance indicators and a clean debt service record, the agency said.

Tunisia’s 8¼% notes due 2027 closed at 108.07 on the Berlin exchange, which was down only 0.21 point on the day. But the bond is down from a 52-week high of 111.30, which was notched in April.

On the positive side, the bonds of Oil and Gas Holding Co., or Nogaholding, were tighter by a basis point, and both Oman and Iraq were trading “pretty well.”

The Latin America debt market desks in New York were quiet on Tuesday, but a couple of national news stories were in focus. Colombia’s presidential election runoff vote on Sunday left right-wing candidate Ivan Duque, who was leading the polls going into the ballot, voter’s top choice, and he will face off against Gustavo Petro, a leftist former guerrilla who was second in the five-man race. A second election between the two is slated for June 17.

Duque was selected by 39% of voters, and Petro was selected by 25%. About 19.6 million, or 53% of eligible voters, cast a vote. Polls show that Colombians are concerned with unemployment, corruption, crime and an immigration crisis developing after more than 1 million Venezuelans have crossed the border, seeking respite from an economic and humanitarian crisis there that shows no signs of resolving soon.

In Brazil, the government of Michel Temer reached agreement with striking truck drivers on Sunday. The seven-day strike left many businesses without supplies and gas stations without fuel and is estimated to cost the government $2.6 billion through the end of the year.

In the broader markets, global stocks fell amid political uncertainty in Italy. The Dow Jones industrial average dropped almost 400 points, and U.S. Treasury yields pulled back.

Italian and Spanish bonds sold off sharply as investors worried about the future of the euro zone single in the face of upcoming elections.

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