Turkey Bonds Extend Rally With Terrorism No Deterrent So Far

  • Credit Suisse, Akbank see more gains in store for bonds
  • Bomb attack in Ankara highlights risks to nation's security

Turkey’s deepening confrontation with terrorism has done nothing to deter the hot money that has driven a market rally the past month.

Even after a car bomb exploded Sunday night 200 meters from the prime minister’s office in Ankara, killing at least 37 people, Turkish bonds gained for a fifth day on Monday.

The reason? Turkey’s debt offers the highest yields in emerging Europe. That’s been enough to attract investors chasing returns as Mario Draghi’s European Central Bank cuts rates further below zero to stoke growth. Buyers from abroad boosted their holdings in the nation’s sovereign notes by the most in 19 months in February, according to central bank data. Yields on 10-year notes have fallen to 10.13 percent from a January high of 11.31 percent. Credit Suisse Group AG and Akbank TAS see scope for as much as 50 basis points of further declines.

“International investors are becoming a lot more accustomed to such explosion attacks in Turkey and don’t pay too much of attention any more," said Apostolos Bantis, a Commerzbank AG credit analyst in Dubai. "The main driver for the latest Turkish bonds rally is last week’s ECB enhanced QE program."

Stocks, too, were undeterred by the violence as the benchmark equity gauge in Istanbul climbed for the 11th day, the longest stretch of advances since June 2012.

Yield Chase

Turkey’s 10-year bonds extended their rally as the government vowed to retaliate quickly following the car bomb -- the third to strike Ankara in the past five months. Similar-maturity Russian notes yield 9.44 percent, while the rate compares with 2.87 percent in Poland and 0.26 percent in Germany.

ECB measures "could add more fuel into the recent rally in Turkish bonds," said Nimrod Mevorach, an emerging-market strategist at Credit Suisse in London, who has a yield target of 9.50 percent for Turkish four-year notes, from 9.88 percent today.

While many analysts predict bond-market gains will continue, they’re also seeking clarity on monetary policy as the term of the current central bank Governor, Erdem Basci, draws to a close on April 19. There’s been no announcement yet on whether he will stay on for another five-year term or be replaced.

‘Low’ Conviction

Basci has kept benchmark borrowing costs on hold for the past year even as an acceleration in inflation prompted calls for tighter policy, drawing some criticism that government officials including President Recep Tayyip Erdogan are encroaching on the body’s independence. As an alternative form of tightening, the governor has pushed up funding costs of banks.

Societe Generale SA highlighted security risks as a reason to stay cautious, while Bantis of Commerzbank said meetings with the European Union on how to address the Syrian refugee crisis also threaten gains. Even after the past month’s rally, Turkish bonds have declined more than any others in emerging markets except Peru’s in the past year.

"Overall investor conviction is low" in Turkish assets, according to Roxana Hulea, an emerging-market strategist at Societe Generale in London, who said the dollar is approaching "oversold territory" against the lira. The currency weakened 0.5 percent to 2.8817 per dollar on Monday.

There’s still room for a bigger bond rally if inflation continues to slow from almost two-year highs, according to Evren Kirikoglu, a strategist at Akbank, Turkey’s second-largest listed lender by market capitalization. Foreign investors, who poured a net $947 million into Turkish bonds in February, probably kept buying last week following a five-day outflow, he said.

Annual inflation fell to a three-month low of 8.8 percent in February as food prices decelerated. The three-month forward implied yield on the lira, a proxy for interest-rate expectations, declined for a fifth day to a three-month low of 10.60 percent on Monday, signalling the pressure is easing on Turkey’s central bank to raise borrowing costs.

"Provided that inflation improves further, I’d expect more performance from bonds," said Kirikoglu, who expects 10-year yields will fall another 50 basis points.

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