Lira Rout upends One of the Best Bond Trades in Emerging Markets.
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The short-term lira slump this month threatens to derail a rally of emerging markets bonds that have handed investors some of the richest returns in Turkish markets.
The debt, with returns of 4.4% in 2021, was the second-worst performer in developing nations after last week President Recep Tayyip Erdogan sacked three central banks. As the Turkish lira plunged, the average yield on the bonds of Turkish companies surged to 4.87%, close to six-month highs.
Before then, Turkish corporate borrowing costs had largely resisted the impact of China's Evergrande Group crisis and rising concern about Taping by the U.S Federal Reserve, which curbed appetite for riskier emerging market assets.
The $40 billion European market has rewarded risk-takers this year amid optimism over welcoming exports, returning tourists and the reopening of Turkish markets. Emerging market credit, meanwhile, lost 2.5% in total returns during the period.
Now, bondsholders say the lira s depreciation is too extreme to leave corporate debt untouched.
The larger the magnitude and the faster it occurs, the more it can hurt corporates, said Barings - Manager of Emerging Market Corporate Debt at Omotunde Lawal, referring to the Turkish Lira losses. While some companies hedged their currency risks, none foresaw the Lira at 9 per dollar, she added. It will take a while for corporates to be able to improve prices to recoup the impact of depreciation. The central bank is expected to cut rates on Thursday, after the firing of deputy governors Ugur Namik Kucuk and Semih Tumen, along with Monetary Policy Committee member Abdullah Yavas, seen as opponents of looser policy. The ban followed a meeting between the Turkish president and central bank chief Sahap Kavcioglu on Wednesday evening.
The lira plunged to record lows, extending the depreciation to almost 20% in this year, the worst among EM currencies. Erdogan - whose ruling AK Party has been basing its electoral success for decades on rapid levels of economic growth - argues that higher interest rates actually push up prices and not the orthodox view that they contain them.
Rising geopolitical risk are also exacerbating the currency s rout as Erdogan considers a military offensive into neighboring Syria.
Borrowers and international lenders have sought to adapt to Turkish market shocks in the past.
Lenders like Akbank TAS and Ziraat Bankasi AS, who tap the market at least twice an hour every year for refinance, took on external borrowing prices in March if the lira tumbled after the shock dismissal of the previous central bank chief.
Akbank and Turkiye Ihracat Kredi Bankasi AS Turk Eximbank are currently in the market to refinance, with at least three more Issuers expected to replace their previous borrowings. An extreme depreciation would hurt confidence and Turkey could face an FX liquidity crunch, said Okan Akin, a credit analyst for AllianceBernstein in London. This is a very real risk when Fed tapering is an important possibility. A large devaluation would endow banks with weak capital ratios and increase the danger of selloff for bank bonds. In April 2028, mobile operator Turkcell Iletisim Hizmetleri AS s $500 million of debt increased five basis points to 4.84% on Thursday, the highest level in five months. Similarly, $700 million bonds of glass maker Turkiye Sise ve Cam Fabrikalari and $650 million bonds of biscuits, chocolate and sweets manufacturer Ulker Biskuvi Sanayi AS maturing Oct. 2025 jumped to their highest level in almost six months.
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