Erdogan Yields Within 1% of Record Show No Panic
Turkey’s anti-government protests that sent the lira to a 17-month low and stocks to the biggest slump in a decade have left holders of longer-dated government bonds showing little sign of panic.
Markets rebounded today after the 10-year lira yields increased 1 percentage-point since a May 2 record low to 7.15 percent yesterday. The yield, which was at 10 percent at the start of last year, fell to 6.87 percent at 5:11 p.m. in Istanbul. The benchmark stock index climbed the most in more than 18 months and the lira strengthened for the first time in six days. The cost to protect Turkish bonds using credit-default swaps was 14 basis points below higher-rated Russia today.
Protesters took to the streets accusing Prime Minister Recep Tayyip Erdogan of increased autocracy, alleging police brutality and demonstrating against curbs on alcohol sales and labor unions and the jailing of army officers and journalists. The benchmark equity gauge, which doubled in four years, closed at a three-month low yesterday. Two-year yields declined the most among major emerging markets in the past year after climbing to an almost seven-month high this week.
“The market reaction so far isn’t really drastic for the bond market,” Neslihan Yilmaz, a trader at Maxis Securities in London, said in e-mailed comments yesterday. “People took off some of their positions but are in rather a wait-and-see mode.”
The yield on two-year lira notes jumped 71 basis points to 6.78 percent yesterday, narrowing the spread with 10-year bonds to 37 basis points, the least since July 25. “Tighter” money-market liquidity sparked the sell-off, according to Inan Demir, chief economist at Finansbank AS in Istanbul.
Today, the yield on the two-year lira notes tumbled the most since at least 2005 in percentage terms, plunging 75 basis points to 6.03 percent. The Borsa Istanbul National 100 index rose 4.7 percent, the biggest jump since November 2011. The gauge plunged 10 percent yesterday.
Central bank Governor Erdem Basci has used an interest-rate corridor to stabilize the lira and rein in lending that fueled a record current-account deficit.
“Primary dealers had to resort to overnight borrowing from the central bank at the ceiling of the interest-rate corridor, which leads to a sell-off in the short end of the curve,” Demir said by e-mail. “The central bank is tightening the liquidity so as to force interbank interest rates higher which would increase the carry return on lira and support the currency.”
The three-month interbank offered rate jumped 58 basis points to 5.74 percent, a five-week high, according to data compiled by Bloomberg.
The central bank will continue to tighten monetary conditions if needed, Basci said May 31 in televised remarks.
The weakness in global markets coupled with the escalation of protests erased the impact of Basci’s verbal intervention “leaving a solid move to be the only viable option in our view,” Tevfik Aksoy, chief economist for central and eastern Europe, the Middle East and Africa at Morgan Stanley in London, said in an e-mailed note yesterday.
Bonds rallied in the past year as Basci narrowed the current-account gap and the country received investment-grade status while stimulus efforts and near-zero rates in the U.S., Europe and Japan lured investors to higher-yielding debt.
The two-year yield had jumped 199 basis points until yesterday from a record-low on May 17 after U.S. Federal Reserve Chairman Ben S. Bernanke signaled the central bank could start tapering its bond purchases if it sees sustained economic improvement. Yields increased 28 basis points on May 31 after a report showed Turkey’s trade deficit widened more than forecast to $10.3 billion in April.
“This is the perfect storm for Turkish markets - a strongly adverse backdrop for global markets, and now some negative noise domestically that undermines investor confidence further,” Benoit Anne, the head of emerging-markets strategy at Societe Generale SA in London, said in e-mailed comments today. In case protests grow further, there may be an “escalation of financial stress,” he said.
Erdogan said protests were the work of extremists, before departing for a three-day trip to North Africa. After a weekend of violent clashes between police and tens of thousands of demonstrators, Istanbul was calmer yesterday, though crowds again gathered in the central Taksim Square.
President Abdullah Gul appealed for calm in a speech in Ankara yesterday, saying the protesters’ message had been received and called it a test for Turkey’s democracy.
“Do not be mistaken: This is no Arab Spring,” Julian Rimmer, a trader at CF Global Trading UK Ltd, said in a research note. The dispute can be resolved “swiftly with some contrition and flexibility from the prime minister,” he said. “The market implications are entirely dependent upon how long it takes Erdogan to climb down from his high horse and pacify the dissent.”
The lira appreciated 0.5 percent to 1.8727 a dollar today. The currency weakened as much as 1.4 percent yesterday to the weakest level since December 2011.
The extra yield investors demand to hold Turkey’s dollar bonds rather than U.S. Treasuries fell three basis points to 189 today, according to JPMorgan Chase & Co.’s EMBI Global Diversified index. That compared with an average of 300 for emerging markets, the index showed.
“It’s been one-way traffic with investors selling yields higher and the currency weaker,” Nigel Rendell, a senior analyst at Medley Global Advisors in London, said in e-mailed comments yesterday. “The demonstrations have set down a clear marker to the government and Erdogan to be more encompassing in the future.”
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