Syria Clash Spills Into Markets as Yields Surge: Turkey Credit

Syria Clash Spills Into Markets as Yields Surge
Turkish soldiers stand guard in Akcakale by the Turkish-Syria border on October 4, 2012 in southern Sanliurfa province. Photographer: Bulent Kilic/AFP/Getty Images

Bond investors are taking fright after fighting in Syria spilled over the border into Turkey, sending yields up by the most in two months as the government in Ankara retaliated against shelling that claimed five lives.

Yields on Turkey’s benchmark two-year notes rose as much as 18 basis points yesterday, paring the biggest drop in emerging markets this year. The lira weakened the most in two months after Turkey responded to the attack by bombarding of Syrian targets. The gap between Turkish dollar bond yields and the higher emerging-market average narrowed and the cost to insure Turkish debt against default increased.

The incident shows the mounting risks of the violence in Syria for Turkey, a country with NATO’s second-biggest army and the region’s largest economy. More than 100,000 refugees have fled the fighting into Turkey, where the government says it has spent around $200 million on providing shelter for them. Artillery units fired into Syrian territory for a second day yesterday, while Prime Minister Recep Tayyip Erdogan received authorization from parliament to send in troops.

“The risk premium is increasing in the wake of these hostilities and it could increase further,” Guillaume Tresca, an emerging-market strategist at Credit Agricole Corporate & Investment Bank, said in e-mailed comments from Paris yesterday.

Military Response

Investors’ concern that Turkey’s 720,000-strong military will be dragged into the conflict sent the lira down by as much as 1.1 percent against the dollar in the hours after Turkey’s retaliation began. The currency gained 0.4 percent yesterday after Deputy Prime Minister Besir Atalay said in an NTV interview that Parliament’s approval of military action was a deterrent measure, “not for war.”

The Ankara-based legislature passed a measure yesterday granting Erdogan’s government a one-year mandate for possible military incursions. “Turkey will never let such provocations by the regime in Syria go unanswered,” the prime minister’s office said in a statement on Oct. 3, referring to the killing of five Turkish citizens when a shell crossed the border from Syria.

The market’s drop was a “knee-jerk reaction,” Edwin Gutierrez, who helps oversee about $9 billion of emerging-market debt at Aberdeen Asset Management Plc in London, said in e-mailed comments yesterday. “I really don’t expect much impact over the medium term, unless things get really ugly in Syria.”

Lira Rebound

The Turkish currency has gained 5.3 percent this year, rebounding from its record low of 1.9224 against the dollar on Dec. 28 to this year’s high of 1.7424 on Feb. 20.

“If it becomes clear that Turkey will step up military action, we will quickly reach the 1.85 level,” Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt, said in e-mailed comments yesterday. “A war will definitely deter international investors, and Turkish assets will be sold across the board.”

The yield on Turkey’s benchmark two-year debt closed 4 basis points higher at 7.61 percent yesterday. The stock market in Istanbul dropped as much as 1.8 percent in intraday trading before closing 0.1 percent higher at 66,909.38.

Credit-default swaps rose for the first time in six days yesterday, adding 2 basis points to 152, according to data compiled by Bloomberg. The premium investors demand to hold Turkey’s dollar-denominated debt over U.S. Treasuries widened 7 basis points, or 0.07 percentage point, to 223, according to JPMorgan Chase & Co.’s EMBI Global Index. Yields on the country’s dollar bonds maturing in January 2030 jumped 13 basis points to 4.39 percent.

NATO Meeting

Syria’s shelling on Oct. 3 marked the first time in this conflict Turkish civilians have been killed in a cross-border attack. Erdogan called an emergency meeting of Turkey’s North Atlantic Treaty Organization allies to request action against the country. Atalay, one of Erdogan’s deputy prime ministers, said Turkey’s priority was to move together with the international community against Syria.

An escalation in tensions may lead investors to sell lira-denominated assets, Suha Yaygin, a director at Toronto-Dominion Bank in London, said in e-mailed comments yesterday. People will “watch the news very carefully,” he said.

Turkish assets rebounded today, with the lira gaining 0.2 percent to 1.7952 per dollar by 5:45 p.m. in Istanbul. The stock market closed 0.7 percent higher and yields on two-year bonds erased yesterday’s gain with a four basis-point drop to 7.57 percent. Credit default swaps fell two basis points to 151.

“Markets are ecstatic that there is not a war,” Murat Ignebekcili, an analyst at EFG Istanbul Securities, said in an interview in Istanbul.

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