Turkey's Stubborn Inflation Seen as Raising Risks for Bond Bulls

(Bloomberg) -- While Turkish bonds boast some of the highest nominal yields in the world, inflation that's sticking stubbornly in double digits is beginning to raise concerns for investors.

Ten-year government securities slid Monday after data showed consumer-price increases slowed less in February than economists estimated, suggesting that a retreat from a 14-year peak of 13 percent reached in November may now be losing momentum.

Turkish bonds rallied toward the end of 2017 as last quarter's surge in consumer prices prompted the central bank to push up borrowing costs again, helping contain inflation expectations. But with the latest data undermining confidence that the worst is behind in terms of price pressures, traders are now beginning to question whether there's room for further gains.

Core inflation has hardly budged from near recent highs even as the central bank maintains what it calls a tight monetary stance. Monday's data show the gauge is running at an annual pace of 11.9 percent as of February, compared with 12.30 percent in December. Meanwhile, a 12-month gauge of CPI expectations is hovering near all-time highs.

“It shows the central bank is really behind the curve,” said Guillaume Tresca, a strategist at Credit Agricole SA in Paris. “I am concerned” about a potential “repetition of the October-November period when the lira depreciated sharply” amid inflation concerns, he said.

Turkish 10-year yields climbed 16 basis points Monday to 12.11 percent. The lira weakened 0.3 percent to 3.8184 per dollar.

The nation's central bank meets on Wednesday and the median estimate in a Bloomberg survey sees no change to the main policy rates.

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma, Keith Jenkins

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