Market Overview

Turkey Tumult Doesn't Ding Demand For EM Bonds

Turkey Tumult Doesn't Ding Demand For EM Bonds

The Ishares Msci Turkey Inv Market Index Fd (NYSE: TUR) tumbled again Wednesday, extending a three-day slide that has seen the lone exchange-traded funded dedicated to Turkish stocks plunge about 14 percent. On Wednesday, volume was again elevated in TUR as turnover in the ETF was more than triple the three-month daily average.

TUR, often one of the more volatile single-country ETFs devoted to a developing economy, has been particularly active in the wake of last Friday's failed coup attempt against President Recep Tayyip Erdoğan.

Typically, emerging markets equities and coups, particularly the failed variety, do not mix well. TUR's recent price action is proving as much, but political volatility in Turkey is not damping investors' demand for emerging markets debt. At least not yet.

However, there is predictable pressure on Turkish debt as a result of the failed coup, an important consideration for investors mulling stakes (or adding to existing investments) in ETFs such as the iShares JPMorgan USD Emer Mkt Bnd Fd ETF (NYSE: EMB).

Related Link: Ugly Results, But Turkey Does Its Job Amid Turmoil

“Last week’s failed Turkish coup, and the resulting crackdown has spooked holders of Turkey’s dollar denominated government bonds. Gauged by turkey’s CDS spread, the market’s perceptions of the country’s credit risk have jumped by more than a quarter from its close on Thursday. Investors are now requiring 283bps of annual premium to ensure Turkish bonds against defaults, the most since February,” said Markit in a recent note.


Like many equity-based ETFs, many fixed income ETFs are weighted by size, meaning Turkey as one of the largest emerging markets debt issuers often has a prime perch in ETFs like EMB. As of July 19, Turkey is EMB's largest country weight with an allocation of 4.98 percent, or 47 basis points more than the ETF allocates to the Philippines.

Turkey has long had a contentious relationship with ratings agency Standard & Poor's and the country drew the ire of Moody's Investors Service, which recently said it could downgrade Turkey's sovereign rating to junk status. Moody's currently rates Turkey one notch above junk territory.

Still, one failed coup is not chasing investors from ETFs like EMB.

“While you could be excused for thinking that Turkey’s recent upheaval could be enough to put a pause to the investor’s insatiable appetite for emerging market bonds, especially since Turkey is the largest constituent of the iBoxx USD Emerging Markets Sovereigns index with a 9.6 percent weight, the Markit ETF analytics database has seen no signs of this. In fact, investors poured nearly $400 million into the 48 emerging market bond ETFs in the two trading days since the coup, extending the asset class’s inflow streak to 15 days,” added Markit.

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