Turkey needs to fly
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Turkey needs to fly

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The Republic of Turkey has set price guidance on a new bond issue that equates to 50bp back of its curve. That is a big, sour number for Turkey to have to offer investors, but its goal at this point must be to reopen the capital markets for its banks and corporates. To do that, Turkey's new bond needs to perform.

Investors have been saying for weeks now that they are looking for a point at which they can re-enter Turkish assets. Yields are at levels that look attractive, the central bank has caved to pressure to raise raises, and US pastor Andrew Brunson is safely back on US soil. 

Though Turkey is still very much in the woods with high debts and a weak currency, it is at last, doing what it can to find its way back to the straight and narrow rather than steaming in the driver's seat, puce-faced, pretending it isn't lost but refusing to ask for directions. Despite yields on Turkey debt still being in excess of 200bp higher than at the start of this year, this is a better moment for Turkey to issue a bond than we have seen since before the summer.

So although Turkey will not want to be offering up bonds with initial guidance of 7.75% — its last 10 year printed in April had a yield to maturity of 6.2%, and its 10 year sold in January yielded 5.25% — this is as good as life in the markets gets for now.

Turkey must also be mindful that it absolutely must get this deal right. Rarely does the fate of a market rest so firmly on one issuer’s shoulders, but that is the case here. For a reopening of Turkey's primary bond markets, so sorely needed, investors need to buy a deal that performs well in the secondary market. 

This is a meal that needs to start with the baklava course, not salad.

Of course, the secondary performance of its bond is not entirely under Turkey's control. Even a perfectly priced bond with plenty of room to perform might leave investors underwater if the market turns bad. All Turkey can do is give itself the best chance of leaving a good taste in investors' mouths, and the best way to do that will be to sweeten the deal and offer a generous yield.

Being generous with pricing now will cost the country, but it is a price worth paying if banks and corporates regain access and prompts investors to start buying again. 

This is a chance for Turkey to start a virtuous circle, and show that the debt management office — which by all accounts has been a voice of reason from the country in talking to investors over the last six months — has the matter in hand. It is right to not to be penny wise but pound foolish.

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