Mrs. Watanabe Fleeing Brazil Taxes Buys Lira Debt: Turkey Credit

Lira bonds sold to individual Japanese investors exceeded those for all other emerging markets last year as Turkish inflation slowed and higher-yielding Brazil fell out of favor amid tax increases and a weakening currency.

The amount of uridashi bonds issued in liras jumped 72 percent in 2012 to an all-time high of $3.7 billion, second only to the bonds in Australian dollars at $6.7 billion, according to data compiled by Bloomberg. The volume of bonds in Brazilian real dropped 27 percent last year to $3.05 billion.

Foreign investors boosted holdings of Turkish bonds to a record last year, lured by yields of about 8.4 percent on average for two-year local currency debt as the country won investment-grade status and the central bank used an interest-rate corridor to rein in inflation and the current-account deficit. Japanese investors, faced with a yield of 0.81 percent on 10-year bonds and a weakening currency, may be spurred to buy foreign assets, including lira bonds, according to UBS AG.

“Turkey has given investors an opportunity to diversify away from Latin America,” Mariya Gancheva, an emerging-market strategist at Mitsubishi UFJ Securities International Plc, said by phone from London yesterday. Japanese investors’ appetite for Turkish debt was underpinned by, “maybe unorthodox but quite successful moves from the central bank to keep everything under control when Europe was under pressure,” she said.

Uridashi Demand

Sales of so-called uridashi bonds, issued in Japan and denominated in foreign currencies, totaled $19.5 billion in 2012 compared with $21.8 billion a year earlier, according to data compiled by Bloomberg. Trades involving borrowing in low-cost nations to invest in economies with higher interest rates have been popular among investors in Japan, where government bonds have the second-lowest yields, after Switzerland. Those investors are sometimes called “Mrs. Watanabe,” a reference to housewife investors who control family budgets.

Carry trades in Turkish lira returned 30 percent last year in yen terms, the best performance in emerging markets after the Polish zloty and the Hungarian forint, according to data compiled by Bloomberg. Investors who borrowed in yen and invested in Brazilian local debt gained 9.8 percent in the period.

Since 2010, Brazilian policy makers have sought to weaken the currency to protect manufacturers by buying dollars and imposing taxes on overseas investors and foreign-currency loans.

Funding Cost

Brazil’s financial operations tax, combined with regulatory changes and currency concerns, “was enough for Japan investors to get a bit nervous and look for diversification,” Win Thin, global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York, said by e-mail yesterday. “New money is going elsewhere, like Turkey.”

Two-year Turkish government debt yielded 6.02 percent at 5:00 p.m. in Istanbul today, the fourth highest in emerging markets, even after falling 483 basis points in 2012. The rate on similar-maturity Brazilian notes topped a list of 20 major developing nations tracked by Bloomberg at 7.77 percent.

The Turkish central bank cut the average cost of funding for lenders to 5.51 percent on Dec. 25 from 11.93 percent on Jan. 6, 2012, as economic growth slowed to 1.6 percent in the third quarter, the lowest level since a 2009 recession. Policy makers lowered the benchmark repurchase rate in December by 25 basis points to a record 5.5 percent.

Extra Yield

Fitch Ratings raised Turkey’s foreign-currency ranking by one level to BBB- from BB+ on Nov. 5, citing an easing in economic risk and lower debt levels.

The country’s first investment grade in 18 years “has given a lot of confidence to the market.” Mitsubishi UFJ’s Gancheva said.

Mitsubishi UFJ Morgan Stanley Securities was the biggest manager of uridashi bonds last year with 19.5 percent of the total issuance, according to Bloomberg data.

The lira weakened 0.1 percent to 1.7697 per dollar.

The extra yield investors demand to hold Turkey’s dollar-denominated bonds rather than U.S. Treasuries rose five basis point, or 0.05 percentage point, to 185 basis points, according to JPMorgan Chase & Co.’s EMBI Global index. The average spread for developing-nation debt also rose three basis points to 267.

Default Swaps

Credit-default swaps on Turkey, rated Ba1, the highest non-investment-grade status at Moody’s Investors Service, rose one basis point to 123, according to data compiled by Bloomberg. That compares with 114 for Brazil and 127 for Russia. The contracts, which rise as investor perception of creditworthiness deteriorates, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Foreign investors have been net buyers of $16 billion in bonds and $6.3 billion in Turkish stocks in the past 12 months, according to data from the central bank published on Jan. 10.

“For now, it seems the Turkish central bank is happy to accommodate modest lira upside and that should act as a tailwind for uridashi and pension fund flows into Turkish lira assets,” Manik Narain, an emerging-markets strategist at UBS in London, said yesterday in e-mailed comments.

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