Emerging market debt pulled down by Turkey; PSA International sells $1 billion in bonds

By Reshmi Basu

New York, June 22 - Emerging market debt finished the session lower Thursday, triggered by continued worries over Turkey's fundamentals.

In the primary market, Singapore's PSA International Pte Ltd. sold $1 billion in a dual tranche offering of five-year and 10-year global bonds (AAA/AA) via Morgan Stanley.

The deal included a tranche of $500 million in five-year bonds, which priced at 99.572 to yield 5.85% or a spread of Treasuries plus 68 basis points and a tranche of $500 million in 10-year bonds, which priced at 99.093 to yield of 6.022% or a spread of Treasuries plus 83 basis points.

Proceeds from the sale will be used to help fund PSA's purchase of a 20% stake in Hutchison Port Holdings.

In secondary trading Thursday, negative sentiment from Turkey continued to weigh down the external debt market as investors now focus their attention to those countries suffering from large current account deficits, according to market sources.

Turkey's financial markets have come under attack since middle of May on the tightening of global rates. Unlike other emerging markets, which have sold off on increased risk aversion, Turkey has seen its external debt positions unwind on its fundamental story as well, according to a market source.

Investors are worried that the government will not be able to follow economic targets as prescribed by the European Union.

One investor observed that with an election in 2007 the government may move in the direction of more popular policies versus policies that would help ensure its E.U. membership.

On Wednesday, Turkey saw its equities, foreign exchange, local rates, and sovereign debt trade down on worries over a combination of factors, including its entry to the European Union. Additionally, the government was dogged by speculation that it would relax inflation targets, a move which it denies planning.

The government Thursday introduced measures in hopes of quelling the ongoing capital flight from its core markets. Those changes included the elimination of a 15% withholding tax for foreigners investing in shares and bonds.

That helped Turkey bonds recover somewhat early in the session, noted a trader. But that reprieve was short lived.

During the session, the Turkish bond due 2012 lost 1.38 to 114.25 bid, 115.26 offered while the bond due 2030 fell one point to 136.25 bid, 136.75 offered.

"People are starting to realize that risk aversion sentiment, in particular for credits that seem to be running high current account deficits such as Turkey, seems to be a favorite topic of the market right now," remarked Enrique Alvarez, Latin America debt strategist for research firm IDEAglobal.

South Africa down

Meanwhile Turkey was not the only country to see its external debt and local currency unwind over worries about its current account deficit. South Africa saw its bonds slide on increased jitters over its ability to access financing, noted a market source.

During the session, the South African bond due 2017 shed 0.75 to 114.375 bid, 115.375 offered.

EM hurt by U.S rates

All in all, it was not a very supportive environment for the asset class, observed sources.

Besides negative sentiment out of Turkey, emerging markets also had to contend with a bearish U.S. equity market as well as a sell-off in U.S. Treasuries, which saw the yield on the 10-year note climb to its highest level since 2002. At session's end, the yield on the 10-year note had shot up to 5.20% from Wednesday's close of 5.15%.

Higher U.S. rates and Turkey worries pushed spreads wider in Latin America.

During the session, the Brazilian bond due 2040 lost 0.60 to 92.60 bid, 93 offered. The Argentinean discount bond due 2033 gave up 1.25 to 90.75 bid, 91 offered. The Mexican bond due 2026 slid 0.50 to 144.50 bid, 145.25 offered. And the Venezuelan bond due 2027 was down 1.10 to 117.60 bid, 118.20 offered.

Since mid-May, investors have been unloading positions. The universe of players is pretty thin, according to IDEAglobal's Alvarez.

Those players include the fast money crowd, who are looking to bargain hunt and then make a swift exit out of the market once conditions have changed.

"The dedicated money has been in the market. I don't think it's moved out that much. Other than that, there really aren't any crossover players that are new to the category," he replied.

One source heard anecdotally that investors were sitting on 4% to 6% cash.

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