Bond Slump Sends Turkey’s Yields Up Most Among Peers in July

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  • Yield on 10-year lira debt jumps 45 basis points in month
  • Lira falls most after Colombian peso among developing nations

Declines in Turkey’s bonds in July drove yields to the biggest increase in emerging markets after a failed coup sparked a government crackdown and a credit downgrade by S&P Global Ratings sent the lira to a record-low.

Yields on 10-year local currency bonds climbed as much as 111 basis points after the July 15 attempted overthrow of the government, before trimming the increase by more than half to end the month up 45 basis points. That compares with a 21 basis-point jump for similar-maturity Russian debt, the second-worst performer. The Ankara-based government’s 4.25 percent 2026 dollar bond was the only security to post losses in the period among nine peers tracked by Bloomberg.

While the nation’s debt and currency have pared losses in the past week, markets could come under further pressure should political turbulence escalate and the government receives a second junk rating, forcing high-grade only investors to sell the nation’s debt. Moody’s Investors Service, which put the sovereign on review for a potential downgrade in July, is scheduled to assess the rating on Aug. 5.

“So-called hot money left immediately and real investors tried to curb their exposure,” said Ogeday Topcular, a managing partner at Ram Capital in Geneva who helps oversee $300 million in fixed-income assets. “From now on the investors’ reaction will depend on the government’s approach to this crisis; how they continue to handle it and whether they can bring stability.”

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The cost to insure Turkish debt against default climbed 33 basis points in July to 275, compared with 239 for Russia. Turkey is rated Baa3, the lowest investment grade at Moody’s and one step above Russia.

Turkey’s political turmoil erupted with the coup two weeks ago and intensified as the government declared a state of emergency, then arrested and purged thousands of people with alleged ties to the uprising. The central bank cut interest rates on July 19 and moved this week to loosen collateral requirements for banks as part of efforts to boost liquidity.

Foreign investors sold a total of $460 million of Turkish stocks and bonds in the week ended July 22, the latest data available from the central bank. In the same week, foreign-currency deposits at local banks decreased by $8.4 billion dollars, according to banking regulator data.

Turkish assets rose on Friday, buoyed by weaker-than-forecast economic growth in the U.S. that bolstered the case for the Federal Reserve to leave interest rates lower for longer. The lira gained 0.7 percent to 2.9906 per dollar as of 6:29 p.m. in Istanbul, leaving its 3.8 percent weaker in July, the biggest drop after Colombia’s peso.

The lira “should withstand the ongoing flow of domestic noise banking on strong support from foreign-exchange deposit conversion and active central bank liquidity management,” Roxana Hulea, an emerging-market strategist at Societe Generale SA in London, wrote in an e-mailed note. Still, “the apprehensiveness of foreign investors remains particularly high ahead of Moody’s rating review,” she said.