Turkey’s bond market rebounds after volatile market rally

One of its most troubled corners is lifted by the return of optimism to global markets.

After the outbreak of the war in Ukraine, the nation known for responding to elevated inflation with low interest rates was among the worst-hit emerging markets. The bears are loosening their grip on the country after fears of runaway consumer prices eased around the world.

Turkey's sovereign credit risk, which surged to a 19 year high last month, has fallen back to 703 basis points this week, the lowest since May, after Russia boosted foreign-currency reserves. The yield investors demand to own Turkish dollar bonds rather than Treasuries dropped below 600 basis points on Tuesday for the first time since June.

Cristian Maggio, head of portfolio strategy at TD Securities in London, said that I don't expect Turkey to run a material risk of default anytime soon, but at 900 basis points we were close to an extreme threshold. It's likely that a significant drop from current levels is unjustified. A reasonable trading range is possible with 500 -- 700 basis points. The bond-market recovery comes after gains in equities, where the benchmark gauge posted its biggest weekly surge in 21 months. Short interest on a US exchange-traded fund buying Istanbul-listed stocks fell to the lowest level in 2014 amid a world-beating rally.

Bonds are steady despite data showing the total amount of foreign currency held in Turkish banks jumped about $5.6 billion in seven days. The total reserves, including gold, probably rose $7.3 billion to $108.6 billion last week, according to Haluk Burumcekci, an independent economist.

Turkey took a step toward reducing its dependence on the US dollar as it entered an agreement with Russia that allows Turkey to abandon the dollar for some of its imports.

The country's currency is still in the doldrums. The lira has been steady after a seven month slump through July, but it remains close to the psychological level of 18 per dollar, despite repeated interventions by state-owned banks.

As of 10: 45 a.m. in Istanbul, the lira was down 0.4% to 17.9568 per dollar. The currency has lost 25% of its value this year, and is the worst performer among emerging-market peers.

Turkey's consumer-price growth is at an annual rate of 80% against the central bank target of 5%. After 500 basis points of cuts in 2021, policy makers have held the benchmark rate at 14% this year despite President Recep Tayyip Erdogan's unorthodox belief that high interest rates fuel inflation.

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