Morning Commentary: Turkish election results take toll on country’s bonds; Greece volatility eyed

By Christine Van Dusen

Atlanta, June 8 – Bonds from Turkey suffered on a volatile but mostly quiet Monday morning for emerging markets assets after unofficial results from the country’s election showed that the AK party lost its majority for the first time in more than a decade.

“Market reaction will be negative in the short term, even though recently it had been pricing in a higher probability of a coalition,” according to a report from Barclays. “This raises the possibility of further underperformance in the [Turkish lira] and local rates.”

Against this backdrop, some industry experts are suggesting that investors show caution when it comes to Turkey’s bonds.

“We recommend that investors who hold Turkish eurobonds take profits, and that others stay away from the market and observe how the situation develops,” according to a report from Schildershoven Finance BV.

Contributing to Monday morning’s volatility was the ongoing turmoil in Greece and news from Ukraine.

“A group of creditors has expressed disappointment that no basis had yet been found for detailed negotiations with Kiev on how to restructure its debt,” Schildershoven said. “Both sides accuse each other of a lack of engagement in talks.”

Also on Monday morning, volatility in U.S. Treasury rates continued, causing sovereign bonds from Asia to tread water until the start of the European session, a London-based trader said.

Then, when London opened, the market saw “Indonesia paper get crushed with offshore sellers,” he said. “The long end is down 1¾ points, the belly is down 1 1/8 points and the five-year is down ½-point.”

Bonds from the Philippines fared a bit better, with local support but light flows, he said.

“The 2034s and 2037s have underperformed, down one point,” he said. “Liquidity here is as bad as we’ve seen over recent weeks. It feels like customers and dealers alike have de-risked a little now and are waiting for re-entry levels, but holding off on pulling the trigger while rates remain so volatile.”

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