Hot Money Ardor for Lira Debt Unfazed by Protests: Turkey Credit

Foreign investors in Turkish bonds aren’t taking fright from the protests that began last month in Istanbul’s Taksim Square.

Investors sold $25 million of bonds in the week after demonstrations broke out on May 31, leaving this year’s inflows at $3.3 billion, according to central bank data yesterday. The yield on 10-year lira bonds has fallen 34 basis points this week after climbing 61 basis points a week earlier, while similar-maturity Russian ruble notes jumped 16 basis points in the past four days, data compiled by Bloomberg show.

The central bank stepped into the market on June 11 to bolster the lira, triggering the currency’s biggest three-day rally in 16 months. Turkey, which offers the fourth-highest yields for local-currency debt among major emerging markets, said the same day that economic growth accelerated more than analysts forecast.

“We just don’t think that the protests will have any meaningful effect on the economy,” Dmitri Barinov, who helps manage about $2.6 billion in emerging-European debt at Union Investment Privatfonds in Frankfurt, said in e-mailed comments yesterday. Turkey’s yields are “attractive” and the money manager kept bond holdings during the demonstrations, he said.

The unrest, which spread nationwide after May 31, has marked one of the biggest challenges to Prime Minister Recep Tayyip Erdogan since he came to power more than 10 years ago, and sent Turkish markets plunging. At least four people died in clashes, and the Turkish Medical Association says more than 4,000 people were treated at hospitals.

Foreign Holdings

Foreign investor holdings dropped to $65.2 billion in the week ended June 7, the least since March, and down from a record $71.8 billion on May 3, according to central bank data.

The absence of a big sell-off “is impressive,” Luis Costa, an emerging-market strategist at Citigroup Inc. in London, said in e-mailed comments yesterday. The data “suggests high-yield curves such as Turkey are in fact much more resilient than what the markets believe.”

The lira strengthened 0.6 percent to 1.8505 per dollar at 5:09 p.m. in Istanbul today, after a 2.1 percent advance in three days, the best performance since the period ended Jan. 27, 2012.

The yield on the two-year note fell for a third day today, dropping 53 basis points, or 0.53 percentage point, to 6.21 percent. That reversed this week’s jump to a 34 basis points fall after a 48 basis-point increase in the first week of clashes between police and protesters.

‘Fast Repricing’

“One of the reasons that might have affected investors’ minds is very fast repricing of the bonds,” Maxim Oreshkin, chief economist for Russia and Turkey at VTB Capital in Moscow, said in e-mailed comments yesterday. “Investors were suddenly caught with a jump in yields to above 6.5 percent on benchmark bonds” and it was too late to sell, he said.

The two-year yield has climbed 142 basis points from a record 4.79 percent on May 17 as speculation grew that the U.S. Federal Reserve will taper its $85 billion in monthly bond purchases. Even after the increase, the yield has fallen 295 basis points in the past 12 months, the biggest decline among major emerging markets.

The extra yield investors demand to hold Turkish dollar debt rather than U.S. Treasuries fell seven basis points to 213 yesterday, according to JPMorgan Chase & Co. indexes. That compares with a one basis-point decrease to 323 for the emerging-market average, the indexes show.

Default Risk

The cost to protect Turkish debt using credit-default swaps declined 12 basis points to 155 today, data compiled by Bloomberg show. The gap with higher-rated Russia narrowed to 10 basis points from 25 at the end of last month. The contracts, whose prices fall as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or cash equivalent should a borrower renege.

The central bank sold $250 million and refrained from lending to banks at its benchmark 4.5 percent one-week repo rate this week for the first time in a year, according to data on its website. The bank also said it was performing additional tightening measures to protect financial stability.

The central bank’s intervention this week sent a “nice, very clear message” to investors, said Union Investment’s Barinov. “They did the right thing and very timely, waited long enough for some short-term money to get out and then stabilized the market.”

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