Turkey Debt Lures Most Foreign Money Since 2013 in Market Bounce

  • Inflows in 2016 follow two years of net outflow of funds
  • Union Investment considers raising exposure to Turkish debt

Foreign investors are buying up Turkish lira bonds at the fastest pace in three years as a shift in mood among money managers in favor of emerging markets gathers pace.

Holdings of Turkish local debt have increased by $2.38 billion this year, the most for the period since 2013, after a record outflow from stocks and bonds in 2015, helping drag yields on 10-year government bonds down more than 70 basis points this month. This makes Turkey the best-performing emerging market after Brazil, according to data compiled by Bloomberg.

“Investors are reallocating from safe-heaven low yielders," Dmitri Barinov, a money manager at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail, adding that he may increase his weighting in Turkish debt to “long” from neutral. "If they keep on going and chase performance, the rally has legs."

Emerging-market assets rebounded in 2016 as the Federal Reserve has become more cautious about tightening U.S. monetary policy, tempering the allure of dollar-denominated investments. In Turkey itself, early assertiveness on tackling inflation by a new central bank chief has eased concerns that politicians would wield too much influence over policy, favoring expansion over discipline.

Turkish 10-year bonds yield 9.24 percent, compared with less than 2 percent on the equivalent U.S. paper. Investment managers BlackRock Inc., Franklin Templeton and Schroders Plc have all stated they are confident the emerging-market rebound has further to run.

Recovering Sentiment

Even so, the recovery in sentiment toward developing countries remains at an early stage. Foreigners’ share of Turkish debt holdings now stands at about 21 percent, compared with a peak of near 29 percent in 2013 before investors’ mood soured.

Many of the risks that drove down emerging markets during 2015 remain in place. The Fed still intends to raise interest rates, albeit with caution, uncertainty surrounds the trajectory of China’s slowing economy, while energy-exporters such as Russia are grappling with budget shortfalls as revenues shrivel before a weakening oil price.

Murat Gulkan, an Istanbul-based portfolio manager at Unlu Portfoy Yonetim AS, said the current early optimism toward Turkish bonds remains fragile. “Positioning is light, obviously, which on the one hand does portend to potential upside but on the other, it’s light for a reason,” he said by e-mail.

The revival of foreign inflows comes alongside a slowdown in inflation this year that’s giving the central bank more room to maneuver on rates. Policy makers have cut the overnight lending rate by 75 basis points since March to 10 percent.

Since Turkey and other emerging markets can do little to counteract the impact of the Fed turning hawkish, "they may as well cut rates ahead, providing relief for their economies," said Simon Quijano-Evans, chief emerging market strategist at Commerzbank in London, who has a market weight recommendation for Turkish fixed income.

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