Turkey dollar bonds mixed as lira drops further; Venezuela flat to lower after drone attack

By Rebecca Melvin

New York, Aug. 6 – Turkey’s dollar bonds were mixed on Monday as the Turkish lira dropped further into record negative territory against the dollar amid worsening tensions with the United States and economic troubles at home. Turkey’s local-currency debt and stocks fell.

The U.S. Trade Representative said on Friday that Turkey’s duty-free access to U.S. markets is being reviewed after Turkey imposed retaliatory tariffs on $1.78 billion of its U.S. imports. Turkey’s retaliation came in response to U.S. sanctions against two government ministers (justice and interior) due to the ongoing detainment of U.S. pastor Andrew Brunson despite diplomatic efforts to free him. Brunson has been detained since 2016 on charges that he was associated with people behind a coup attempt that year.

According to U.S. law, those under sanctions have their assets and properties under U.S. jurisdiction blocked, and American businesses and individuals are prohibited from engaging in financial transactions with them.

Following the sanctions decision last week, the lira climbed to 4.90 to the dollar. It closed last week at 5.08 and reached 5.20 earlier Monday. Later Monday it hit 5.36 to the dollar despite Turkey’s central bank lowering the foreign exchange markets reserve requirement limit to 40% from 45%, which adds about $2.2 billion of liquidity to the banks.

The yield on Turkey’s 5 1/8% notes due October 2028 ticked a little lower by 0.06% to 7.4944%. Other sovereign bonds, including the February 2028 notes, saw slightly higher yields, however.

In addition to tensions with the United States, there are worries about Turkey’s worsening economic picture. It has very high foreign-denominated debt that will be difficult to service at current exchange rates. Meanwhile President Recep Tayyip Erdogan, who wields increased political powers after his re-election in June, has not inspired confidence among investors as he promises to keep interest rates down and has taken such actions as appointing his son-in-law as finance minister.

Emerging-markets debt in general was subdued on Monday as trade issues were front and center in the minds of portfolio managers. China has said that it might impose tariffs on all U.S. imports into that country.

Meanwhile Venezuela’s sovereign bonds and those of Petroleos de Venezuela SA did not react much to the news of a drone attack against president Nicolas Maduro on Saturday. Two drones loaded with explosives came within yards of the president, who was speaking at an outside event.

Venezuelan authorities said they arrested six suspects tied to the attack and that more arrests were expected, raising concerns about the implications that a renewed police crackdown might have on markets.

But Venezuela bonds were only slightly weaker on Monday, and PSVSA was unchanged, a New York-based trader said.

The PDVSA 8½% notes due 2020 were seen 91 bid, 92 offered, which was unchanged on the day. The PDVSA 2020 bonds are the only Venezuelan bonds that are not in default.

The latest U.S. action regarding the debt was the Treasury Department’s modification of its latest round of sanctions allowing U.S. bondholders the right to seize Venezuelan assets should the Caracas government default in the repayment of its 2020 state oil company bonds.

Prior to the modification, seizure of government-owned collateral for any unpaid Venezuelan bonds would have been illegal under a May 21 executive order. Now bondholders can seize assets owned by the government including vessels, properties, or financial assets.

Investors are focused on what happens to PDVSA’s U.S.-based subsidiary Citgo, which is used as collateral for the bonds and which are mentioned specifically by the Office of Foreign Assets Control. Citgo owns three large U.S.-based refineries. The firm has been the focus of a recent legal dispute between the Venezuelan state and U.S. oil giant ConocoPhillips, which is attempting to collect $2.04 billion recently awarded by the International Chamber of Commerce as compensation for the 2007 expropriation of the firm’s Venezuelan assets. Apart from targeting PDVSA’s Caribbean assets, there are concerns that ConocoPhillips will go after Citgo’s assets in the United States.

Elsewhere Latin America’s debt market were “very quiet,” a second New York-based market source said.

“There was some buying of duration in the sovereign space, with Mexico, Uruguay and Colombia outperforming Peru,” the source said.

There was also some corporate buying action in Mexico and selling of Argentina corporates.

© 2015 Prospect News.
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