Draghi Deflation Fight to Propel Lira Bond Rally: Turkey CreditSelcuk Gokoluk
European Central Bank President Mario Draghi is proving to be an ally of investors in Turkish lira government bonds.
While Draghi weighs monetary stimulus measures to counter slowing euro-zone inflation, yields on Turkey’s two-year notes have dropped the most among at least 40 bond markets tracked by Bloomberg since March 30 elections calmed political tensions roiling the government. The lira also rallied in the period, gaining the most after South Korea’s won in 24 emerging markets.
Even as note yields remain 4.4 percentage points higher than the record low from May last year, the trend is down as investors chasing returns in the region are lured to the debt, said Tatha Ghose at Commerzbank AG. Central Bank Governor Erdem Basci, who unexpectedly raised interest rates in January to stem a run on the lira, will also get help from Europe in his fight against inflation because weak price growth there will damp pressures at home, he said.
“We will go into low-yield mode again for the next few months, and Turkish bonds will be among the most attractive in the region,” Ghose, a senior emerging-market economist at Commerzbank in London, wrote in e-mailed comments on May 15. “Turkey will import this deflation and consumer prices will start surprising to the downside. This will refuel the bond rally.”
Consumer price gains in the 18-nation euro area touched a four-year low 0.5 percent in March, prompting Draghi to say on May 9 that ECB officials are “comfortable” with taking further action at their next meeting, scheduled for June 5, to counter the threat of deflation.
The prospect of monetary stimulus from the ECB is likely to drive down euro-zone yields, forcing investors to look elsewhere for returns. Turkey’s Basci said on April 30 that he will probably cut borrowing costs if inflation expectations show a sustained move downward and risk premiums fade.
Turkish consumer prices accelerated more-than-forecast to 9.4 percent last month, pushing two-year yields up by the most since January, according to the statistics office on May 5.
The central bank is “responsible only for price stability,” Basci said at a conference two days later, according to the state-run Anadolu Agency. Policy makers target 5 percent inflation.
While the lira has rallied this quarter, it remains 13 percent lower over the past 12 months, the biggest drop in developing Europe and Africa. It fell to a record 2.39 per dollar on Jan. 27 as accusations of graft against the government, which surfaced in December, rocked markets.
Turkey’s currency declined last week by the most since February and traded 0.8 percent weaker at 2.1127 at 5:07 p.m. in Istanbul. Two-year note yields fell one basis point to 9.19 percent, paring their decline since the March elections to 160 basis points. Local markets were closed yesterday for a public holiday.
“We can see yields retreating somewhat further now that the election process is drawing to a close,” Evren Kirikoglu, a strategist at Akbank TAS in Istanbul, wrote in e-mailed comments on May 15. “There is a possibility that inflation will slow more than is currently thought.”
Turkey’s central bank will probably keep its benchmark one-week repurchase rate unchanged at 10 percent on May 22, according to the median of 15 estimates in a Bloomberg survey of analysts. The rate was increased from 4.5 percent after an emergency meeting on Jan. 28.
The Treasury sold 1.01 billion liras of May 2024 inflation-linked bonds in competitive auctions today after getting 5.3 billion liras bids. It also sold 528 million liras of February 2016 fixed-rate notes at a bid-to-cover ratio of 6.82 and 1.6 billion liras of March 2019 fixed-rate notes covered 2.8 times.
U.S. Treasury and German bund yields fell to at least 10-month lows on May 15 after reports showed an unexpected drop in U.S. industrial production and slower-than-forecast growth in the euro region.
“Emerging-market rates, including Turkey, are lower because they are lower in the U.S.,” Paul McNamara, a London-based investment director at GAM U.K. Ltd., wrote in e-mailed comments on May 15. “Turkey should be able to sell at historically low yields.”