JPMorgan, Commerzbank Pondering Turkey Bond Yield Bottom

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Banks from JPMorgan Chase & Co. to Morgan Stanley and Commerzbank AG are weighing the outlook for Turkey’s two-year note yield after it fell below 5 percent for the first time amid fading inflation concern.

Two-year yields will drop to 4 percent, according to Tatha Ghose at Commerzbank, Germany’s second-biggest lender. Morgan Stanley says the current low rate isn’t justified, while Turk Ekonomi Bankasi AS predicts yields won’t fall further. The yield sank to as low as 4.96 percent on May 3 before rising to 5.14 percent, trimming the drop in the past year to 419 basis points, the most among 17 emerging markets tracked by Bloomberg and more than twice the slide for Polish notes, the next largest decline.

Turkish inflation slowed more than economists estimated to a two-year low in April, giving the central bank room to reduce interest rates. Even with the drop in yields, Turkey still offers the fifth-highest rate in emerging markets as policy makers globally rely on stimulus measures to revive growth.

“We may test towards 4.5 percent,” Yarkin Cebeci, an economist at JPMorgan in Istanbul, said in e-mailed comments on May 3. “Sounds unbelievable, but this is the reality. Given ample global liquidity, a strong domestic story, low inflationary pressures and a dovish central bank, bond yields could fall further.”

Negative Yields

Swiss, Germany and Finnish two-year yields trade near zero while Australia’s 2.51 percent rate is the highest among 22 developed countries, according to data compiled by Bloomberg at the end of last week.

India cut interest rates for a third straight meeting on May 3, a day after the European Central Bank lowered its main rate to a record 0.5 percent. ECB President Mario Draghi said last week that policy makers had an “open mind” on reducing their so-called deposit rate below the current level of zero for the first time.

The lira weakened for a fourth day, sliding 0.2 percent to 1.7983 per dollar at 6:00 p.m. in Istanbul today. The currency has depreciated 0.8 percent this year. The two-year note yield fell two basis points to 5.12 percent.

Moody’s Investors Service rekindled expectations of a rating upgrade on April 11 when it praised Turkey’s peace talks with the Kurdistan Workers’ Party in an effort to end a conflict that began in 1984.

‘Upgrade Story’

“Turkey has a rating upgrade story and funds in the system are also cheap and abundant,” said Ali Cakiroglu, a strategist at HSBC Asset Management in Istanbul. “If this euphoria continues, we can see the benchmark bond yields reach 4.8-4.9 percent.”

Fitch Ratings lifted Turkey to investment-grade status in November, the economy’s first such ranking in 18 years. Moody’s and Standard & Poor’s rate Turkey one level below investment grade. Investors who borrowed in U.S. dollars and bought Turkish lira debt earned 5.4 percent over the past year, according to data compiled by Bloomberg.

Turkey’s economy grew 2.2 percent last year, the slowest pace since a recession in 2009, and down from 8.8 percent in 2011. The economy needs to grow at least 6 percent a year to meet its goal of becoming one of the world’s top 10 economies by the 2023 centennial of the Turkish Republic, Economy Minister Zafer Caglayan said April 1.

The extra yield investors demand to hold Turkey’s dollar bonds rather than U.S. Treasuries fell one basis point, or 0.01 percentage point, to 185 today, compared with an average 269 basis points for emerging markets, JPMorgan’s EMBI Global Diversified index showed.

No Logic

“I don’t think there is a clear logic behind yields anywhere in emerging markets these days,” Tevfik Aksoy, chief economist for emerging Europe, the Middle East and Africa at Morgan Stanley in London, said in e-mailed comments on May 3. “As long as investors get a tiny amount of carry, they will pile in.”

Turkey’s central bank reduced all three of its main interest rates last month, citing an increase of capital inflows. The Monetary Policy Committee is next scheduled to meet May 16.

Yields on Turkey’s two-year notes may fall to 4 percent and then stay there through year-end, while rates on longer-maturity debt rise, according to Ghose, Commerzbank’s senior emerging-market economist in London.

Inflation and overheating worries are disappearing around the world and won’t be back for three years, Ghose wrote in e-mailed comments. “I would be much more bullish for two-year bonds.”

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