Turkey’s Lira Bonds Are Drawing Foreign Investors

Turkey’s local currency bonds drew a net $375 million of overseas buying last week, the largest inflow since March 2021.

(Bloomberg) — Turkey’s local currency bonds drew a net $375 million of overseas buying last week, the largest inflow since March 2021.

The surge was driven by increased confidence in the country’s monetary policy after a bigger-than-expected interest-rate hike the previous week. The bulk of the gain came from Turkish banks’ overseas branches lifting their holdings of bonds, central bank data showed.

The nominal value of local lenders’ bonds held abroad rose 1.5 billion liras, while the market value jumped 9.5 billion liras, suggesting they mostly opted for inflation-linked debt, traders said. Foreign investors’ nominal holdings rose 288.7 million liras, with funds that were underweight adding to their positions, traders said.

Central Bank Governor Hafize Gaye Erkan and Finance Minister Mehmet Simsek are actively tightening monetary policy and unwinding unorthodox measures. President Recep Tayyip Erdogan appointed the former Wall Street bankers to the key positions following elections in May, in an effort to reverse years of foreign investor outflows from Turkish assets.

Turkey Circles the Wagons to Appease Market Doubting Erdogan

Some foreign investors have closed short positions in Turkish bonds after the central bank raised the policy rate by 750 basis points to 25% in August and signaled of more to come, traders said. Meanwhile, foreign capital inflows into Turkish equities turned positive following three weeks of outflows. Foreigners purchased a net $254 million in stocks during the week ending Sept. 1, as the Borsa Istanbul benchmark index reached a record high.

As the government emphasizes its commitment to cut rampant inflation, Wall Street banks are raising their year-end policy rate forecasts. JPMorgan Chase & Co. anticipates a 1,000 basis-points increase in September and October, while Morgan Stanley has raised its year-end rate expectation to 35% from 30%.

Market Metrics

  • USD/TRY little changed at 26.8496
  • 10-year benchmark lira bond yield +32bps to 23.5%
  • 10-year benchmark dollar bond yield -8bps to 8.45%
  • 5-year CDS flat at 385bps
  • Borsa Istanbul 100 Index +0.5% to 8,380.16
  • U.S. Treasury 10-year bond yield -1bps to 4.23%
  • Brent crude +0.6% to $90.43 per barrel

(Updates with central bank data on bond holdings.)

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.