Tuesday 07, August 2018 by Bloomberg

Turkish bond surges as lira gets a respite

 

The 10-year bond yield jumped 24 basis points to 19.91 per cent, the highest since Turkey first issued debt of this maturity in 2010. 

  

The nation’s benchmark 10-year notes slid, sending yields to a record high, as investors increasingly concerned by a lack of central bank moves to backstop the nation’s assets sought higher risk premiums.

The lira won a brief respite after slumping the most since an attempted military coup in 2016.

Turkish assets have come under fire amid heightened concern over a diplomatic spat with the US, and the central bank’s inability to support the currency against accelerating inflation as well as one of the widest current-account deficits in emerging markets. The lira has weakened around 27 per cent this year and the yield on 10-year bonds has surged more than 800 basis points.

“It’s getting nastier,” said, Henrik Gullberg, a strategist at Nomura. “And it will remain like this until the central bank commits unconditionally to hike rates and keep them high until inflation has turned. The market needs that sort of hard commitment.”

The lira strengthened 2.4 per cent to 5.21 per dollar. It slumped 4.6 per cent on Monday, the most since 2016, after reaching 5.42 per dollar, the weakest on record.

The market rout comes as Turkey prepares to auction five-year fixed-coupon and 10-year inflation-linked bonds later Tuesday. The Treasury lowered its planned borrowing targets for August and September after months of loose fiscal policy and heavy bond supply that have weighed on demand. It plans to borrow a total TRL 10.8 billion ($2.1 billion) in August, down from TRL 12.2 billion, according to the Treasury’s latest borrowing strategy.

For the rot in the nation’s assets to stop, the central bank needs to do more than just raise rates, according to Gullberg.

“The bottom line is the central bank needs to hike rates to 20 per cent or above, and tell markets that we will not be afraid of hiking further and keeping real rates high until inflation has clearly turned,” added Gullberg.

 

 

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