March 13, 2018 / 1:33 PM / 5 months ago

UPDATE 1-Turkish bonds fall, CDS rise on economy, election concerns

(Adds comments, context on downgrade, inflation)

LONDON, March 13 (Reuters) - Turkish assets sold off on Tuesday, with sovereign dollar-bond prices down across the curve and debt insurance costs rising as concern grew about political risk and the state of the economy.

Turkey’s parliament passed a controversial voting law on Tuesday that the opposition said could open the door to fraud and jeopardise the fairness of 2019 polls.

Data earlier this week also showed Turkey’s current account deficit surged in January.

And the conflict in Syria has reached a critical stage with Turkish military encircling Afrin.

“Generally, we are bearish about Turkey,” said Tatha Ghose, an economist at Commerzbank. “Global yields are rising, which is what Turkey is quite susceptible to.”

Turkey is considered one of the emerging markets more vulnerable to U.S. interest rate rises, because of its high external borrowing requirements.

Turkish assets came under pressure across the board, with Turkey’s January 2041 eurobond down 0.6 cents to 93.74 cents in the dollar, the lowest level since early February 2017, according to Thomson Reuters data.

The April 2043 issue also fell 0.5 cents to 80.3 cents in the dollar, the lowest since end-January 2017.

Turkish five-year credit default swaps rose 5 basis points (bps) from Monday’s close to 174 bps, according to IHS Markit data, a one-week high.

Phoenix Kalen, a strategist at Societe Generale, said that investors had been reducing long positions in the aftermath of the Moody’s ratings downgrade last week. Moody’s cited a weakening of institutions and the increased current account risks.

“The underperformance of the bonds also relates to the large February issuance, where a lot of investors participated with the expectation of lower inflation outturns,” she said. “So when the February CPI missed ... this resulted in some bond selling.”

Turkish consumer prices climbed 0.73 percent in February, outstripping expectations.

The 10-year local government benchmark bond yield rose to 12.75 percent, its highest since Nov. 2017 and up 90 basis points since the start of last week. Turkish bank stocks fell over 1 percent.

The lira also plumbed a record low against the euro and hit its weakest against the dollar since December.

“The lira’s sell-off was triggered by the higher than expected current account deficit published on Monday – a timely reminder of Turkey’s reliance on capital inflows to cover its substantial gap,” analysts at Rabobank said in a note.

Reporting by Claire Milhench, additional reporting by Tom Balmforth, editing by Larry King

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