May 08 2018

Stress in Turkish bond market as investors flock to dollar

Turkey’s bond market is showing signs of stress as investors flock to the safety of the dollar.

Margins between the bid and offer price of Turkish bonds are widening and volume is decreasing, wrote Uğur Gürses, a columnist for the Hürriyet newspaper.

Foreign investors who bought Turkish debt are now complaining about margins widening and are hedging with foreign exchange, citing risks associated with the lira, Gürses said.

Turkish bonds have sunk to record lows this week after the lira continued to lose value against the dollar and other major currencies. Yields on 10-year debt rose to 14 percent, while the two-year bond saw yields above 16 percent. The central bank has remained silent as the lira fell, even as investors called on its policymakers to increase interest rates.

The central bank should have met at the weekend for an emergency meeting of its monetary policy committee, Gürses said. Instead, it announced on Monday that it was increasing liquidity in the currency market by $2.2 billion. The move has done nothing to arrest the currency’s decline.

The central bank is saying it can’t raise interest rates, so it wanted to try and calm the currency market through other means, Gürses said. What the bank needs to do is increase the interest rate for its late liquidity window – currently 13.5 percent – by at least 250 basis points, he said.

Inflation data for April showed prices for 299 of 407 goods increasing, unprecedented since 2003, Gürses said. The slide in the lira over the last eight days will add about 1 percentage point to inflation, which already stands at 10.9 percent, he said.