Rally Ending as Bernanke Exit Seen Matter of Time: Turkey CreditBenjamin Harvey
The biggest emerging-market bond rally is showing signs of ending amid speculation the U.S. Federal Reserve is moving closer to phasing out unprecedented stimulus measures.
Turkey’s two-year lira bonds plunged the most in more than four years yesterday, sending the yield as much as 35 basis points higher. The yield rose another 27 basis points today to 5.79 percent. The yield on 2023 dollar-denominated bonds sold in January by the Treasury in Ankara was at 3.73 percent today, extending a six-day increase to 44 basis points and taking it 160 above 10-year U.S. Treasuries, compared with 122 a week ago.
The sell-off comes as signs of a U.S. recovery fueled speculation that Fed Chairman Ben Bernanke will trim purchases of $85 billion a month in Treasury and mortgage debt. The steps were designed to support the world’s largest economy by putting downward pressure on interest rates. Turkey has been a prime beneficiary, as abundant U.S. liquidity whetted risk appetite just as the country clinched its first investment-grade ratings in 18 years.
“This Fed exit talk is serious and the more people talk about it, the more they will sell Turkey,” Isik Okte, a strategist for the investment unit of state-run lender Turkiye Halk Bankasi AS, said in e-mailed comments yesterday. “U.S. economic data is good, so the thinking is ’let’s sell.’”
U.S. consumer confidence climbed to a five-year high, data showed on May 28, while a measure of property values had the biggest 12-month gain since April 2006. The U.S. gross domestic product probably rose at a 2.5 percent annualized rate in the first quarter, the Commerce Department will say today, confirming an April 26 release, according to the median estimate of 80 economists surveyed by Bloomberg.
Bernanke and some colleagues disagree about when to curtail the central bank’s extra measures, also known as quantitative easing. Philadelphia Fed President Charles Plosser called this month for reducing purchases at the Fed’s next meeting in June, while St. Louis Fed chief James Bullard said on May 23 he wants to continue the current pace as long as falling inflation is a concern. Bernanke stressed last week that a premature exit risks hampering growth.
“Markets are starting to price what will be one of the most important inflection points of the past few years: the early stages of the removal of unprecedented policy stimulus provided by the Federal Reserve,” Michael Gavin, emerging-markets strategist at Barclays Capital Inc. in New York, said in an e-mailed report May 28. “Market movements are saying the Fed’s exit is now more ‘when’ than ‘if’.”
Investors concerned that the Fed will reverse its easing should consider taking short positions, betting on a decline in risky assets that have benefited most from global liquidity, Gavin said, citing Turkish equities as an example. Emerging-market currencies will probably also remain weak, with nations carrying large current-account deficits such as Turkey being harder hit, UBS analysts including Bhanu Baweja said in a report the same day.
Turkey will publish trade balance data for April on May 31. The deficit probably widened to $7.8 billion in the month, according to the average estimate of five economists surveyed by Bloomberg. Inflation data for May will be announced on June 3. The rate in April was 6.13 percent, above the yield on two-year Turkish notes.
Any future move in Turkish rates is “hard to predict since it almost wholly depends on global moves,” Tevfik Aksoy, chief economist for central and eastern Europe, the Middle East and Africa at Morgan Stanley in London, said by e-mail yesterday. “At negative real rates investors would find it hard to justify keeping sizable positions, let alone taking new ones.”
Turkish two-year bond yields could rise above 6 percent should the yield on U.S. 10-year Treasuries increase to 2.4 percent, according to Ali Cakiroglu, a strategist at HSBC Asset Management in Istanbul. The U.S. yield was at 2.15 percent at 7:13 p.m. yesterday in Istanbul after earlier reaching 2.23 percent, the highest in 13 months.
The 5.79 percent yield on two-year debt at the close today compares with 4.93 percent at the close on May 20.
The lira fell 0.8 percent to 1.8762, the weakest since January 2012 and bringing its decline this month to 4.5 percent. The currency has been the second-worst performer among 10 major emerging markets since May 16, when Turkey was upgraded to investment grade at Moody’s Investors Service. That confirmed its ranking after Fitch Ratings gave Turkey the same certification in November.
The upgrades removed a key driver for Turkish gains after helping to drive a 387 basis-point decline in benchmark bond yields over the past 12 months, Cakiroglu from HSBC said. The decline was the biggest among 16 major emerging markets with two-year debt tracked by Bloomberg.
“All the good news has already been priced and we are back to basics,” Cakiroglu said. “Further correction is possible.”