Hot Money Warms Again to Turkish Lira Amid Run of Inflows

Higher-than-forecast Turkish inflation isn’t putting off foreign traders as they snap up the nation’s debt in the longest run of buying in more than a year amid bets interest rates will keep falling.

Overseas investors bought a net $134.4 million of Turkish government bonds in the week ended July 4, the sixth straight increase and the longest streak of purchases since a six-week run that ended in May last year, according to central bank data published today. The buying helped push two-year note yields down by 38 basis points in the period, contributing to this year’s 1.75 percentage-point drop, the most in emerging markets.

Turkish inflation slowed by just 0.5 percentage point last month to a higher-than-estimated 9.2 percent even after the central bank predicted a “marked decline” in consumer-price growth in June. Policy makers, led by Governor Erdem Basci, will follow last month’s 75 basis-point reduction in the benchmark one-week repurchase rate with a further 50 basis-point cut on July 17, according to a Bloomberg survey of economists.

“I am overweight Turkey and will keep investing if I get fresh fund inflows,” Dmitri Barinov, a money manager overseeing $2.6 billion of debt at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail yesterday. With inflation on the decline and the central bank cutting rates, inflows are poised to continue, he said.

Repo Agreements

Purchases by foreigners of Turkish government bonds were $705 million in the week to July 4. Most of that, $507.6 million, was in the form of repurchase agreements in which bonds were lent to international banks as collateral for loans.

Two-year note yields surged to an almost five-year high of 11.60 percent on March 24 as graft accusations against the government in the run-up to municipal elections on March 30 pushed the lira to the weakest on record against the dollar. Basci responded with a more than doubling of the benchmark rate to 10 percent after an emergency meeting on Jan. 28. The administration of Prime Minister Recep Tayyip Erdogan has denied all allegations of corruption.

“The high yield of lira bonds is attracting carry traders following the January central bank rate-increase,” Lutz Roehmeyer, who helps manage $1.1 billion of emerging-market assets at LBB Invest, said by e-mail from Berlin yesterday. “Now that the bank has started to cut the interest rate again,” investors can profit from Turkish bonds, he said.

Inflation Outlook

Overseas cash is pouring into the nation’s debt even as inflation stays near a two-year high. Consumer-price gains were almost 0.4 percentage point above the 8.8 percent median estimate in June, statistics office data showed July 3.

Traders predict inflation will average about 6.5 percent over the next two years, according to so-called break-even rates, the difference between index-linked and nominal-bond yields. The central bank’s target is 5 percent, and it predicts the figure will slow to 7.6 percent by the end of this year.

“I don’t think flows into Turkey will continue,” Mehmet Taylan, the chief executive officer of A1 Capital Securities in Istanbul, said yesterday by phone. “Year-end inflation may remain above 8.5 percent. There has to be an improvement in the outlook.”

Inflation accelerated as the lira plunged to an all-time low of 2.39 per dollar on Jan. 27, as a weaker currency increases the cost of imports. The lira has strengthened 12 percent since then. It weakened 0.6 percent to 2.1273 per dollar at 5:12 p.m. in Istanbul. Two-year note yields dropped 3.25 percentage points since their March peak to 8.35 percent today.

“Many investors that had reservations about Turkey are gradually being pulled in because, like it or not, Turkey’s working,” Michael Harris, managing director at Renaissance Capital, said in a July 4 interview in Istanbul. “They didn’t think Turkey would cut rates so soon after the lira came under pressure, but the world is allowing it and they are cutting.”

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