Teenage Death Roils Markets as Turkey Bond Yields Surge

A teenager’s funeral morphed into anti-government demonstrations, highlighting political divisions before elections this month and further damaging sentiment already hurt by a corruption crisis.

Ten-year bond yields jumped 70 basis points in the past four days to a four-year high 11.24 percent yesterday, the biggest increase among 21 emerging markets tracked by Bloomberg. Rates on two-year notes surged and sovereign credit risk worsened. The lira has weakened 9.4 percent against the dollar since the graft probe targeting the administration of Prime Minister Recep Tayyip Erdogan erupted on Dec. 17.

The renewal of demonstrations this week deepens the turmoil engulfing Turkey as emerging markets wrestle with China’s slowing growth and the Federal Reserve pulls back from record stimulus. Crowds that Hurriyet newspaper estimated to be in the tens of thousands, and Vatan said were in the hundreds of thousands, joined a funeral procession in Istanbul yesterday for 15-year-old Berkin Elvan, who was hit by a gas cannister during last year’s Gezi Park protests and died on March 11 after nine months in a coma.

“All these corruption allegations and protests add up to a sour external environment,” Nigel Rendell, a senior analyst a Medley Global Advisors, said in e-mailed comments from London yesterday. “Investors will basically steer clear of Turkey.”

Peaceful Protest

Elvan’s death galvanized opposition to Erdogan, who has fended off a corruption probe by removing prosecutors, reassigning police and changing laws. Erdogan didn’t mention the death as he rallied supporters in the eastern cities of Siirt and Mardin yesterday before local elections scheduled for March 30.

The funeral procession passed peacefully as onlookers cheered and waved banners of support from balconies and cars honked. Protests in Ankara, Istanbul and Izmir were later dispersed by tear gas, and Hurriyet reported that one person was killed in clashes in Istanbul’s Kurtulus district overnight.

“Erdogan is dividing the country,” said Naci Kiziltas, a 54-year-old businessman in the textile industry who was attending the funeral. “We’re marching for human rights, for democracy and for respect.”

Elections for mayors in March and the president in August will be held against the backdrop of a slowing economy. Turkey’s gross domestic product will probably expand 2.3 percent this year, according to the median of 31 economist estimates compiled by Bloomberg, compared with an average of about 5 percent during Erdogan’s 11 years in power.

Weaker Lira

UBS AG slashed its growth forecasts for Turkey this week, to 2.3 percent from 3.8 percent in 2014 and to 3.8 percent from 4.3 percent next year. The lira will weaken to 2.25 per dollar by year-end and 2.35 in 2015, Reinhard Cluse, London-based chief economist for Europe, the Middle East and Africa, wrote in the March 11 report.

The lira strengthened 0.2 percent to 2.2271 per dollar at 1:05 p.m. in Istanbul today after reaching a record low 2.39 on Jan. 27. The premium investors demand to hold Turkish dollar debt over U.S. Treasuries was little changed at 305 basis points, compared with 319 for Russia, 117 for Poland and 241 for Brazil, according to JPMorgan Chase & Co. indexes.

The cost to insure Turkey’s dollar debt against default for five years using credit default swaps fell three basis points to 246 today after yesterday jumping 17 basis points, the biggest increase this year, according to data compiled by Bloomberg

Erdogan blames the corruption probe on followers of U.S.- based Islamic cleric Fethullah Gulen, saying they’re colluding with the opposition in an effort to overthrow him via a coup.

“We suspect that medium-term trend growth and Turkey’s standing as a place to invest might have suffered” as a result of “triple whammy” of Fed tapering, political tension and the corruption scandal, Cluse wrote.

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