Yield Hunters Flock to Turkey as Fed Stokes Emerging-Bond RallyConstantine Courcoulas
Turkey’s dollar bonds, among the worst performers in emerging markets this year, are luring back investors as the Federal Reserve’s delay in lifting interest rates revives the global hunt for yield.
Turkey raised $1.5 billion Wednesday in its first sale of new bonds denominated in dollars in more than a year. The yield on the April 2026 notes was 250 basis points over 10-year U.S. Treasuries.
While Turkey’s June 7 parliamentary elections, accelerating inflation and slowing economic growth have made lira bonds this year’s emerging-market laggards, the nation’s dollar debt has been buoyed by comments from Fed Chair Janet Yellen suggesting the U.S. won’t raise rates any time soon.
“There is a delay in the Fed hikes so there is some appetite for emerging markets again at the moment,” Michel Danechi, a fund manager at Aramajaro Asset Management in London who placed an order for the bonds, said by phone on Wednesday. “The concerns about elections and so on will manifest more on the local currency.”
As the ruling AK Party prepares to face voters, economic growth has slowed to 2.9 percent in 2014 from 4.2 percent a year earlier. Inflation at 7.6 percent is above the central bank’s target of 5 percent. The lira slumped to a record low against the dollar March 13.
Turkey’s offering follows dollar bond sales from Colombia, Ecuador and Armenia over the past month. Malaysia is marketing as much as $2 billion of Shariah-compliant notes in the U.S. currency.
“The timing is actually pretty well chosen,” Dmitri Barinov, a money manager at Union Investment Privatfonds in Frankfurt, said by e-mail Wednesday. “Demand for external debt from emerging markets is picking up again in a globally low-yield environment.”
The prospect of higher U.S. interest rates earlier this year sparked a rally in the dollar and heightened concern over the vulnerability of Turkish assets.
Turkey’s domestic risks are “under control, at least in the short term -- until the election,” Hakan Aksoy, a London-based fund manager at Pioneer Investment, which oversees $244.1 billion globally, said by e-mail Wednesday. “There is demand in the market.”
Federal Reserve Bank of New York President William C. Dudley said the central bank should err on the side of waiting too long as it considers when to raise interest rates for the first time in almost a decade. The remarks have reinforced signals by policy makers, including Yellen, that they’re in no hurry to start raising rates.
The lira rose 0.1 percent to 2.5977 per dollar at 1:38 p.m. in Istanbul. The yield on two-year government notes increased two basis points to 8.8 percent.
“The fact that the dollar has stopped strengthening is a good thing for Turkey and that might continue for another couple of months,” Danechi said. “There is no doubt in Turkey’s ability to repay.”