Turkish Bond Rally Beats European Peers in Quarter of Rate Cuts
(Bloomberg) -- Turkey's sovereign bonds gained for a third quarter as the central bank cut borrowing costs and turmoil after the U.K. voted to leave the European Union left traders betting tighter U.S. policy now lies far in the future.
The yield on Turkish five-year debt fell 80 basis points this quarter, making it the best-performing sovereign bond in emerging markets after Brazil. Foreign investors poured a net $275 million into Turkey's bond market over the past three months, shrugging off political turbulence that saw the prime minister resign in May. The lira has fared less well, heading for its first quarterly loss in three.
With implied yields on federal funds futures signaling a U.S. interest-rate increase is unlikely before 2018 and Turkish policy makers lowering the overnight lending rate 175 basis points since March amid slowing inflation, bonds have thrived. By trimming the yield on the lira, Turkish monetary easing has left investors less keen on the nation's currency.
“The performance of lira fixed income is a natural consequence of the central bank's easing efforts, compounded by the declining U.S. Treasury yields,” Roxana Hulea, an emerging-market strategist at Societe Generale SA in London, said by e-mail.
Tourist Trade
Lower borrowing costs are also set to boost bank profits as lenders respond by cutting the interest they pay to savers faster than they reduce charges on loans.
Still, pressure on Turkey's tourism industry from a diplomatic spat with Russia over the shooting down of one of its jets, only resolved this week, and a series of deadly terrorist attacks are weighing on the nation's stocks. Tourist arrivals plunged 35 percent in May, marking a 10th month of declines, fueling concern the economy will slow and asset quality at the nation's banks will deteriorate.
“We are yet to see the impact of dismal tourism season on the economy,” Murat Borekci, the London-based co-head of equity research at Yapi Kredi Yatirim, said by e-mail.
To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net. To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Chris Vellacott, Daliah Merzaban
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