Turkish bond yields surged the most on record and the lira and stocks tumbled after a weekend of street demonstrations against Prime Minister Recep Tayyip Erdogan’s government.
The yield on benchmark two-year lira bonds rose 71 basis points to 6.78 percent, the biggest jump since at least April 2005 when Bloomberg began compiling the data. The benchmark stock index plunged 10 percent, the most in a decade, and the lira weakened for a fifth day, sliding 0.8 percent to 1.8903 per dollar at 5:30 p.m. in Istanbul, a 17-month low.
Clashes in Istanbul began May 31 and continued late yesterday in Ankara and Istanbul as protesters took to the streets calling for Erdogan, who has led the country since 2003, to resign. The unrest was ignited by police tear-gassing a park in Istanbul occupied by people who opposed plans to tear it down for a government redevelopment project. By June 1, tens of thousands had poured into the central Taksim Square, which demonstrators have now barricaded to keep police forces out.
“The markets are scared,” Jerome Broex, a currency and fixed income trader at Turkish Bank in Istanbul, said in e-mailed comments. “Nobody knows what’s going to happen next.”
Erdogan showed no sign of backing down as he responded to reporters’ questions before leaving Istanbul for Morocco, the first stop of a three-day regional visit. He blamed the opposition Republican People’s Party of “being in solidarity” with what he said were extremist groups. The prime minister said he’s “restraining” his own supporters from taking to the streets in response.
Five-year credit-default swaps, or the cost to insure the nation’s debt against default for the period, jumped 12 basis points to 143, the highest intraday level since April 4 and the biggest increase since September 2011, according to data compiled by Bloomberg.
The unrest occurred after a week in which stocks, bonds and the lira had already been sliding as the prospect of tighter monetary policy in the U.S. led investors to pull money out of emerging markets.
The yield on Turkey’s two-year note rose 28 basis points to 6.07 percent on May 31 after a report showed the trade deficit unexpectedly widened in April. The rate climbed 80 basis points last week, the steepest increase among major emerging markets tracked by Bloomberg and compared with the second-biggest jump of 50 basis points for similar-maturity South African debt.
The yield on the 10-year notes surged 31 basis points today to 7.15 percent after climbing 52 basis points last week. The lira depreciated 1.5 percent last week, its fourth weekly drop.
“I would expect the Turkish authorities, particularly the central bank, to be active in re-assuring investors,” Tim Ash, chief emerging market economist at Standard Bank Plc in London, said by e-mail today. “The problem is that the lira was weak last week on global market concerns, so the backdrop is not supportive.”
Demonstrators have complained of what they say is Erdogan’s Islamic-rooted government’s increasingly autocratic style. They point to police brutality, curbs on alcohol sales and labor unions, and the jailing of army officers and journalists on charges of plotting against the government.
The protests coming amid the downturn in emerging markets “gave the sell-off an extra kick,” Turkish Bank’s Broex said. The lira will weaken to as low as 1.92 per dollar in the short term and bond yields will “definitely go up,” he said.