Trading opportunities in Turkish CDS after first sukuk sale

Continuing along the lines of several negative basis trades we have highlighted, and following the nation’s first Islamic bond sale, here is a video by Reuters Insider analyst Vincenzo Albano called Turkish Debt and CDS Offer Trading Opportunities, describing the current negative basis spreads between the cash bonds of Turkey and Turkish credit default swaps.

Other interesting observations:

• current correlation between CDX Emerging Markets Index (CDX.EM) and Turkey CDS of over -0.9  (almost perfect negative correlation and has routinely stayed over -0.6 over longer time periods)
• domestic demand for Turkish cash bonds far exceeds their demand for Turkish CDS. (This is probably not surprising for watchers of the domestic capital markets given the country’s exceptionally strong and successful first Islamic bond, or sukuk, sale last week after months of rumours. As Turkey is also considered a part of Europe by some, the 45 percent oversubscribed offering was also Europe’s first Islamic bond issue. Kuveyt Turk sold $100 million (Dh367.2 million) of 3-year 5.25% coupon Sharia compliant Islamic bonds with at least 51% of the receivables from Ijara contracts (the rest from Murabaha). The deal was primarily bought by financial institutions. Since the successful sale, the bank plans to issue over $100 million of 5-year sukuks in 2010.)
• While uniformly negative, the degree of the negative basis is quite varied. For example, 1-year bond basis is over 90 bps while 2-year bond basis is around 40 bps.