Pimco, UBS wooed by Turkish debt after central bank rate hikes

Some of the world’s top emerging market bond investors are returning to Turkey’s debt markets, wooed by central bank hikes to interest rates and an improving inflation outlook.

Pacific Investment Management Co. (Pimco), UBS Asset Management and Vanguard are dropping their hawkish stance on Turkey and returning to the local bond market. Amundi and UBS have raised Turkey to “overweight” in their emerging market debt portfolios, Bloomberg reported on Wednesday.

Pimco is among leading global firms betting that interest rate increases – the central bank has increased borrowing costs to 17 percent from 8.25 percent since September – will help to ease inflation of 14.6 percent and slow credit growth, according to Bloomberg's Selçuk Gökoluk.

“We think now is a good time to invest in Turkey,” said Pramol Dhawan, Pimco’s head of emerging markets. “The policies we have seen were in the right direction, and as long as Turkey follows through these policies, it can be a beneficiary of the favourable external environment for emerging markets.”

Foreign investors have bought $3.1 billion of Turkish bonds since November, raising the share of foreign holdings of Turkish domestic debt to 4.4 percent. Bloomberg said the level is still very low in global terms, with non-residents holding 24 percent of Russian bonds, 48 percent of Mexico and 30 percent of South Africa.

Vanguard Asset Management closed all its lira-short positions after a second rate hike late last year, Bloomberg reported, citing Nick Eisinger, co-head of emerging markets active fixed income at the firm.

“Turkey has started to do the right thing,” said Hakan Aksoy, senior fund manager at Amundi. “It has a beaten-up currency and a very high carry. At a time when yields are negative globally in many nations, the central bank is hiking interest rates, promises reforms and this makes us excited about the Turkish market.”

Some emerging market investors are less hopeful for a turnaround in Turkey, pointing to President Recep Tayyip Erdoğan and questioning how long he will allow the central bank to keep rates high, Bloomberg said. Erdoğan, who has sacked two central bank governors in two years, reiterated his opposition to high interest rates twice this month.

“We are not constructive yet,” said Gustavo Medeiros, deputy head of research at Ashmore Group in London. “We need more consistency in monetary and fiscal policy to regain confidence in the market.”