It was Bloomberg which first sounded out EM fund managers about their interest in the TL government debt market. Most sounded cautious, awaiting higher yields and a weaker TL. In a second invitation, Bloomberg reporters who heralded on Thursday that “Turkey’s Lira Lures Carry Traders Once Again”.
The article states that “The unnatural steadiness of Turkey’s currency depreciation is drawing the attention of so-called carry traders, a type of investor that borrows where interest rates are low and seeks to put money to work where returns are higher.
While the Turkish lira has been consistently losing value — extending its record-low level nearly every day for the past three months — its daily losses have been contained within a very narrow range, averaging just above 0.1%. As a result, one-month implied volatility, a gauge of expected price swings in the currency, sunk below 10% this month to near the lowest level this year”.
Emre Akcakmak, a senior consultant at East Capital in Dubai stated that “Some investors are now dusting off their old spreadsheets,” “[the lira is] displaying “crawling peg-like behavior,” a reference to a government policy of allowing only gradual shifts in a currency. Also noteworthy, he said, “is the shift in dynamics, with short-term yields now surpassing the recent changes in parity.”
Quite coincidentally, BNP Paribas also issued a report on Wednesday, titled “Turkey: TURKGBs gaining in appeal”, where research analysts suggest “TURKGBs are becoming more attractive following the CBRT’s monetary policy adjustment in recent months”.
The research note adds that In our model portfolio, our exposure to TL and TURKGBs (government bonds) is neutral, but we think duration exposure in TURKGBs is becoming attractive once front-end repricing is over”.
“Carry for an FX hedged TURKGB exposure is still negative given the inverted yield curve and elevated FX swaps. We therefore prefer to wait for the front-end of the TURKGB curve to adjust fully before adding duration overweights…”
Not necessarily a ringing endorsement, but certainly a “heads-up” report that could attract interest from EM fixed income and currency funds, which are vastly underpositioned in TL fixed income.
Once a carry trade heaven, attracting close to $70 bn of international investment including swap positions, TL debt market had suffered a premature death in the hands of former economy czar Nurettin Nebati and former CBRT governor Sahap Kavcioglu.
Mehmet Simsek’s economic recovery program largely relies on international financial flows into the system to boost confidence and mitigate the pain of higher loan rates on consumers and firms.
Turkish experts who deal with international clients, on the other hand, suggest that most fund managers will want to see the results of 2024 March local elections and whether Mehmet Simsek retains his job afterwards, before dipping their toes into the market.
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