Fed QE Concern Mixes With Supply Driving Up Rates: Turkey Credit

Yields on lira debt rose to the highest in almost seven weeks as Turkey prepared for its biggest month of debt sales since November amid concern the Federal Reserve will end its bond-buying program this year.

Turkey plans to borrow 11.6 billion liras ($6.5 billion) this month in five auctions, starting with the sale of four-year notes and 10-year inflation-linked bonds today and benchmark two-year debt tomorrow, according to a Treasury statement Dec. 31. Two-year yields jumped to as high as 6.44 percent last week, the highest since Nov. 19.

The world’s biggest bond rally among major emerging markets in 2012 may peter out as Fed minutes of its December meeting released Jan. 3 showed policy makers will probably end their $85 billion in monthly bond purchases, known as quantitative easing, this year. Yields rose earlier after a report that day showed a smaller-than-expected slowdown in Turkish inflation in December.

“The Treasury is unlucky that the debt sales coincided with the developments in the U.S.,” Ugur Kucuk, a fixed-income strategist at Is Investment Securities in Istanbul, Turkey’s biggest brokerage, said in e-mailed comments on Jan. 4. Turkey will have to pay more at tomorrow’s auction of two-year debt, he said.

Borrowing Plans

The Treasury plans to sell 34.6 billion liras of debt this quarter, up 89 percent from the last three months of 2012. Tomorrow’s sale of two-year securities comes after the government paid 5.77 percent to raise 960 million liras for similar-maturity debt on Dec. 11.

The yield on two-year benchmark notes rose as much as 16 basis points, or 0.16 percentage point, before ending the week at 6.36 percent, according to data from Turk Ekonomi Bankasi AS. Yields dropped 483 basis points last year, the biggest decline among 20 emerging markets as foreign investors bought a record $16.2 billion of the country’s bonds.

“Participation of foreign investors will be crucial in the auctions,” Murat Yardimci, head of trading at ING Bank AS in Istanbul, said in e-mailed comments Jan. 4.

Turkey is also planning to sell bonds due in 2022 tomorrow and 15-month zero-coupon bonds on Jan. 15, according to a statement by the Treasury Dec. 31.

The auctions come after the country’s economic growth slowed to 1.6 percent in the third quarter, the lowest level since a 2009 recession. The central bank lowered the benchmark repurchase rate last month by 25 basis points to 5.5 percent.

The two-year yield jumped 12 basis points, the most in three months, on Jan. 3 as a report from the statistics office showed inflation slowed to 6.2 percent in December. That exceeded the 6 percent median estimate in a survey of economists by Bloomberg.

Fed Minutes

“Risk-reward for buying Turkish local bonds has clearly improved following the selloff in the bond market after the December” inflation data and Fed minutes, Esther Law, a director of emerging-market strategy at Societe Generale SA in London, wrote in an e-mail Jan. 4. “We expect to see further upside in yield ahead of the heavy issuance.”

The lira climbed less than 0.1 percent to 1.7821 per dollar at 11:44 a.m. in Istanbul. The Turkish currency appreciated 6 percent last year, the largest gain in emerging Europe after the Polish zloty and the Hungarian forint.

The extra yield investors demand to hold Turkey’s dollar-denominated sovereign bonds rather than U.S. Treasuries fell five basis points to 160 today, JPMorgan Chase & Co.’s EMBI Global index showed. That compares with the average 246 for emerging markets.

Default Risk

Credit-default swaps on Turkey were unchanged at 117. That compares with 121 for Russia and 76 for Poland. Rising prices show deteriorating perceptions of a borrower’s creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or cash equivalent should a government or company fail to adhere to its debt agreements.

“I had been positive” on the auctions until the Fed announcement, Bugra Bilgi, a hedge-fund manager at Garanti Asset Management in Istanbul, said in e-mailed comments Jan. 4. Bilgi predicted the Treasury will sell benchmark debt at between 6.40 and 6.50 percent. “The market somewhat turned sour after the Fed statement,” he said.

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