Turkey has taken some in the market by surprise after announcing a US dollar 10-year benchmark. The country has been engulfed by a series of negative economic and political headlines, which had seen the lira hit a series of record lows against the US dollar.
At one point last week the lira fell to 3.94 against the greenback, 10% lower than at the start of the year, before recovering to be quoted at 3.79 this morning. A central bank meeting, scheduled for January 24, is seen as pivotal in determining not only the monetary policy response to the situation but also as a guide to how independent the institution is given the government's recalcitrant position on rate hikes. Most economists think a minimum 200bp interest rate increase is needed to stem the lira's fall.
Many bankers in the bond market, therefore, thought it unlikely Turkey would issue before that central bank meeting.
But with Turkish credits proving relatively resilient - the sovereign's October 2026s are only 3bp wider since December 30, albeit having traded in a 30bp range over that period - the sovereign has decided to push ahead. "They've got a lot of issuance to come and this is a decent window," said a source. Turkey plans to raise about US $6bn this year in the international markets.
In addition, with the ECB meeting on Thursday, Trump's inauguration on Friday, the Turkish central bank meeting next Tuesday and a Fitch rating review and potential downgrade on January 27, there are few other free days for Turkey to issue in the next couple of weeks. Secondary flows have picked up and some emerging markets investors had indicated they were willing to buy new Turkish paper.
The deal has begun marketing at a cheap level, however, with one investor putting the new issue premium for the Mar 2027 bonds at around 50bp at the initial talk of 6.35% area.
"Its quite attractive. It's such a good discount to the market that this looks pretty cheap. There should be quite a lot of interest," said Max Wolman, portfolio manager at Aberdeen Asset Management.
"They had to offer up quite a good incentive to where the existing bond is trading, given how serious things are on the ground," added Wolman.
Delphine Arrighi, portfolio manager at Old Mutual Global Investors, agrees the pricing is attractive. "Their initial guidance looks very cheap compared to the existing, which should help fuel some demand for it." A banker away from the deal reckons fair value is in the low 5.90% area, indicating a 40bp-plus premium. However, a trader thought it was more like 30bp. Turkey (Ba1/BB/BBB-) has a few bonds in the belly of its curve including Apr 2026s and October 2026s. The former closed Tuesday at 5.75% and the latter at 5.83%, according to Tradeweb, implying fair value at 5.90%. Both have jumped 15bp higher following the new deal's announcement.