Turkish Bond Yields Rise amid Lira Selling by Foreign Investors
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
In the midst of foreign investors selling lira, Turkish investors are holding higher yield bonds over wide speculation that national interest rates will decline.
In the midst of foreign investors selling lira, Turkish investors are holding higher yield bonds over wide speculation that national interest rates will decline.
Throughout December and most of January, yields on two-year government bonds dropped by 147 basis points. Estimates are that this is the second-biggest drop in any emerging market. There is also mass speculation that Turkey’s central bank Governor, Erdem Basci, will kick off a series of rate cuts as soon as possible. Foreign investors have withdrawn roughly 1.1 billion dollars from their investments in lira debt in the second week of January, the highest since August 2014.
Table of Contents
Interest Rate Cuts Look Imminent
About five of six Turkish banks and even a few brokerage firms have predicted that Basci will cut interest rates for the first time since July 2014. There is also widespread optimism that policy makers at the central bank will lower borrowing costs, especially after Turkey’s President Recep Tayyip Erdogan said last week that he did not know why the central bank was waiting so long.
In its effort to suppress the looming threat of deflation, the European Central Bank is considering all stimulus measures that could even include large-scale purchase of sovereign bonds that could drive yields to new record lows. Policy makers from India to Egypt have cut borrowing costs substantially in the past month.
High Volatility Hitting Lira Harder than Anticipated
Erdogan has repeatedly called for the central bank to lower interest rates in the past year but Basci has held his ground despite the political pressure. One-week repurchase rates are unchanged since July of 2014. He had more than doubled the rates at an emergency meeting held last January in order to stop the lira from sliding.
In December 2014, the lira depreciated 4.9% against the US dollar, making it one of the six worst performing emerging-market currencies in the world. It dropped 0.7 % to 2.3430 per dollar last week.
Oil Deflation could Lower Inflation
Domestic investors are betting lower oil prices will help reduce interest rates. Brent crude, the global benchmark, has dropped in value by more than 50% from its 2014 peak. Turkish inflation declined to 6.81% this week, compared to 7.21% in December, according to a European Central Bank survey. Predictions are that low oil prices will help the inflation rate drop substantially in the first quarter of 2015, as reported by a financial strategist at the ING Bank in Istanbul.
Garanti Bankasi AS, the transcontinental republic’s largest listed lender released a statement saying that it expected one-week repo rates to drop to 7.5% in 2015. Domestic economists believe that the central bank will reduce rates and increase its exposure to the bond market, but foreigner investors are more cautious.
