Turkish bonds rallying, but foreigners are absent

Turkish bonds have rallied amid an improvement in sentiment towards emerging markets, but foreign buyers are remaining on the sidelines, looking for progress in Turkey’s fractious relations with the United States.

While Turkish lira-denominated bonds led gains across developing nations in September, foreign investors cut their ownership of the debt to the lowest in six years, Bloomberg’s Constantine Courcoulas said. That suggests a further jump if they start rebuilding positions, he said.

Turkish bonds currently offer nominal yields of more than 18 percent. Should a Turkish court release U.S. pastor Andrew Brunson in a hearing on Oct. 12 – its refusal to do so prompted sanctions from Washington in August -- the lira could rally to stronger than 6 per dollar and take bonds with it, said Henrik Gullberg, a strategist at Nomura Holdings in London.

The lira’s losses of almost 40 percent this year have fueled inflation, which now stands at 17.9 percent and is set to push higher in September and October. Foreigners own just over 12 percent of Turkish bonds, the least since at least 2012, according to Courcoulas.

Foreigners also want to see Turkey further stabilize its relations with the European Union, said Christian Wietoska, a strategist at Deutsche Bank.

The lira strengthened 0.3 percent to 6.09 per dollar at 11:12 a.m. in Istanbul on Thursday.