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Lira Carry Trade Rebounds as Hot Money Earns 2.8%: Turkey Credit

Investors who bet on lira bonds using the carry trade this month are making the region’s second-biggest returns as speculation mounts the Federal Reserve will delay the start of scaling back monetary stimulus.

Traders who borrowed in U.S. dollars and used the proceeds to invest in the Turkish local-currency debt earned 2.8 percent, the most among emerging markets in Europe, the Middle East and Africa after Hungary’s forint, according to data compiled by Bloomberg. The nation offers the highest two-year yields in developing countries after Brazil and India.

Turkish assets are headed for a second month of gains after the Fed unexpectedly refrained from reducing bond purchases on Sept. 18. Policy makers probably won’t start cutting stimulus until March after a U.S. government shutdown slowed the economy, a Bloomberg survey showed.

“The Fed is now likely to continue its quantitative-easing program well into next year that is supporting risky assets,” Thu Lan Nguyen, a Frankfurt-based currency strategist at Commerzbank AG, wrote in e-mailed comments yesterday. “The lira is outperforming now, because it was also one of those currencies which was hit the most by the quantitative-easing tapering storms before.”

The yield on two-year lira notes rose four basis points, or 0.04 percentage point, to 7.85 percent at 4:07 p.m. in Istanbul, increasing from their lowest in a month yesterday, when local trading resumed after being closed for a holiday most of last week. The two-year rate peaked at a 19-month high of 10.16 percent on Aug. 26.

Budget Impasse

The U.S. government opened last week after a 16-day shutdown because of a congressional deadlock over the nation’s debt ceiling. The Fed will pare the monthly pace of asset buying to $70 billion from $85 billion at their March 18-19 meeting, according to the median of 40 estimates in a Bloomberg survey of economists. The budget impasse in Washington reduced growth by 0.3 percentage point this quarter, economists said in the survey.

Turkey’s carry trade, which offered the best monthly returns in the EMEA region intraday yesterday, should perform relatively well as concern eases over the U.S. fiscal situation and the global economy improves, according to Henrik Gullberg, a London-based strategist at Deutsche Bank AG, the world’s biggest currency trader.

“However, it is undermined by some weak fundamentals,” he said in e-mailed comments yesterday. “The current-account deficit remains very large and it is showing few signs of narrowing.”

Widening Gap

Turkey’s shortfall will probably widen to 7.4 percent of gross domestic product this year from 6.1 percent last year, according to International Monetary Fund data this month.

The current-account gap is forecast to increase as the economy rebounds from its slowest growth since the recession in 2009. Central bank Governor Erdem Basci has pledged not to raise interest rates this year to support the recovery.

The lira strengthened 0.5 percent to 1.9714 per dollar today, extending this month’s advance to 2.4 percent, the biggest appreciation in emerging Europe after the Hungarian forint and the Polish zloty. Turkey’s currency depreciated to a record close of 2.0685 against dollar on Sept. 5 and, even after recent gains, is down 9 percent in the past six months.

“The market simply got too negative,” Nigel Rendell, a senior analyst at Medley Global Advisors in London, said by e-mail yesterday. “Relative global calm should make high yielders look attractive and the yield pickup in Turkey is still high versus most other markets.”

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