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Story of an EM single-B rally by jbchevrel, August 29, 2023
Turkey CDS is one of the heavyweights in the CDX EM index, used to have a 15% weight, then 12%, now 10%, as the maximum weight allowed in the index decreased. Sentiment toward Turkey risk has shifted over the past twelve months, thanks to a spectacular central bank’s pivot. Last autumn, Turkey CDS widening was amplified by dovish CBRT: Sep 22, they cut -100bp to 12%, consensus built around another -100bp cut in October, CBRT actually cut -150bp to 10.5% consensus then built around another -150bp cut to 9% which did happen. CDS briefly went 900bp! This spring, CDS collapsed to 480bp and curve steepened, as the market expected an opposition *united* against Erdogan. After 1st round, it became clear that Erdogan would win, with 5% Ogan voters: CDS widened to 700bp on expectations of ultra-loose monetary/fiscal policies, inflation 40-50%, current-account deficit/gdp 5%+, falling TRY. CDS reverted below 500bp after orthodox Simsek was named Economy minister. CDS oscillated around 500bp since, with 1s5s around 150bp. On June 22, the CBRT hiked +650bp to 15%. The range of expectations going into the event was wide, the median estimate was 20% 1w repo. That took CDS wider, pushing above 500bp. The next day, Simsek said that his policy would target price stability but that the process would be conducted gradually. The widening was contained as the market gave credit to the CBRT for further hikes. Also, Turkey CDS is a heavy carry going into July-August, something which argues for compression vs tighter sovereigns, despite us approaching the five year anniversary of the August 2018 lira crisis. Last week, August 24, the CBRT hiked +750bp to 25%. The median expectation was a 250bp hike to 20%. That took CDS tighter, pushing below 400bp, -25bp tighter. Today, JOLTS job opening coming in at 8.8k vs 9.5k expected was the main macro mover, taking 10-year US yields -12bp lower, and helping Turkey 5-year CDS another -15bp tighter, below 370bp for the first time since September 2021.
Turkey CDS is one of the heavyweights in the CDX EM index, used to have a 15% weight, then 12%, now 10%, as the maximum weight allowed in the index decreased. Sentiment toward Turkey risk has shifted over the past twelve months, thanks to a spectacular central bank’s pivot. Last autumn, Turkey CDS widening was amplified by dovish CBRT: Sep 22, they cut -100bp to 12%, consensus built around another -100bp cut in October, CBRT actually cut -150bp to 10.5% consensus then built around another -150bp cut to 9% which did happen. CDS briefly went 900bp! This spring, CDS collapsed to 480bp and curve steepened, as the market expected an opposition *united* against Erdogan. After 1st round, it became clear that Erdogan would win, with 5% Ogan voters: CDS widened to 700bp on expectations of ultra-loose monetary/fiscal policies, inflation 40-50%, current-account deficit/gdp 5%+, falling TRY. CDS reverted below 500bp after orthodox Simsek was named Economy minister. CDS oscillated around 500bp since, with 1s5s around 150bp. On June 22, the CBRT hiked +650bp to 15%. The range of expectations going into the event was wide, the median estimate was 20% 1w repo. That took CDS wider, pushing above 500bp. The next day, Simsek said that his policy would target price stability but that the process would be conducted gradually. The widening was contained as the market gave credit to the CBRT for further hikes. Also, Turkey CDS is a heavy carry going into July-August, something which argues for compression vs tighter sovereigns, despite us approaching the five year anniversary of the August 2018 lira crisis. Last week, August 24, the CBRT hiked +750bp to 25%. The median expectation was a 250bp hike to 20%. That took CDS tighter, pushing below 400bp, -25bp tighter. Today, JOLTS job opening coming in at 8.8k vs 9.5k expected was the main macro mover, taking 10-year US yields -12bp lower, and helping Turkey 5-year CDS another -15bp tighter, below 370bp for the first time since September 2021.
