Lira Bonds Worst Performer as Policy Confuses: Turkey CreditSelcuk Gokoluk
Turkish lira bonds underperformed all other major emerging markets last month amid skepticism that the central bank’s measures to contain loan growth will work.
Two-year note yields jumped 66 basis points in March, erasing declines earlier this year, in the biggest monthly increase in local-currency debt among 16 emerging markets tracked by Bloomberg. Investors who bought lira bonds incurred the first monthly losses since January 2011, according to a Bank of America Merrill Lynch index.
A day after cutting overnight lending rates by 100 basis points, the central bank said March 27 that its overall strategy was to tighten monetary policy to rein in lending and the current-account gap. The statement spurred an eight basis-point surge in the benchmark two-year yield to a four-month high.
“The central bank’s policy mix still requires a lot of explaining,” Manik Narain, an emerging-markets strategist at UBS Bank AG in London, said in e-mailed comments on March 27. “With credit growth running well in excess of the central bank’s target, yet the central bank seemingly reluctant to embrace an obviously more hawkish stance, investors have begun to take profits after a very strong run.”
Bank lending grew 19.9 percent in the 12 months to March 15, exceeding the central bank’s year-end target of 15 percent.
Last month’s jump in yields left the rate on benchmark lira debt 20 basis points higher for the year. Foreign investors sold $1.6 billion of Turkish bonds in the five days ending March 15, the biggest weekly outflow since 2007, and another $166 million the following week, according to central bank data.
While the current-account deficit jumped for a third month in January to $5.63 billion, a report March 29 showed an unexpected narrowing in the trade balance in February.
The Monetary Policy Committee in Ankara cut the upper end of its so-called interest-rates corridor, the overnight lending rate, to 7.5 percent from 8.5 percent while leaving the lower band, the overnight borrowing rate, unchanged at 4.5 percent and the benchmark one-week repurchase rate at 5.5 percent.
“The current policy framework is expected to contain the widening in the current-account deficit,” the central bank said. Policy makers use rates to control capital flows and prevent volatility in the lira, and other measures including frequent reserve requirement adjustments to curb bank lending, which may widen the deficit by fueling demand for imports.
While the central bank didn’t raise reserve requirements last week, it made holding foreign exchange or gold more expensive by increasing a so-called reserve option coefficient. The Turkish economy expanded 1.4 percent in the fourth quarter in the slowest pace since recession in the third quarter of 2009, according to data announced by Turkish state statistics agency on website today. The lowest estimate at a Bloomberg survey of 11 economists was 1.7 percent.
“Banks are confused because they are unsure whether interest rate margins will rise or fall,” Ugur Kucuk, a fixed-income strategist at Is Investment Securities, Turkey’s biggest brokerage, said in e-mailed comments on March 27. “But the picture for the bond market is clear, my recommendation is to sell short-term debt and buy long-term debt.”
The overnight cost of borrowing in the interbank market jumped to 6.14 percent from 5.70 percent on the day the central bank reduced the overnight lending rate and climbed to its highest since September at 6.50 percent on March 29.
“I can only see one reason” for the increase on the interbank market, Peter Skoettegaard Oeemig, an economist at Jyske Bank A/S in Silkeborg in Denmark, said in e-mailed comments on March 27. “The central bank changed the assessment of the macroeconomic situation, an early warning of needed future monetary tightening.”
Governor Erdem Basci introduced his rates corridor in October of 2011, a policy that allows him to mix funding among three different rates rather than relying on a single benchmark rate. The lira tumbled 18 percent that year and yields jumped 390 basis points as the current-account shortfall widened to a record 10 percent of gross domestic product.
The lira strengthened 0.2 percent to 1.8076 against the dollar at 5:36 p.m. in Istanbul today, paring last month’s 0.7 percent decline. The currency depreciated 1.3 percent this year.
Two-year yields rose three basis points to 6.38 percent today. Yields on Turkey’s 10-year bonds were unchanged at 7.16 percent, after last month’s 35 basis points advance, the most since September 2011.
The extra yield investors demand to hold Turkey’s dollar-denominated sovereign bonds rather than U.S. Treasuries fell one basis point to 229 on March 28, trimming the increase in March to 27 basis points, the most since May, according to JPMorgan Chase & Co’s EMBI Global Diversified index.
Five-year credit-default swaps on Turkey rose seven basis points to 148 on March 28, up nine basis points last month. That compares with 17 basis-point monthly increase to 164 for Russia. The contracts, which rise as perceptions of creditworthiness deteriorate, pay the buyer face value in exchange for the underlying securities or cash equivalent if a borrower fails to adhere to its debt agreements. Markets were closed in the U.S. and western Europe on March 29.
“Credit stress is starting to rise again and there is still a great deal of confusion in the market,” UBS’s Narain said. “The market will be waiting for these signs of slower credit growth before pushing yields lower again.”