Market sentiment has shifted significantly across Turkish fixed income assets over the past two weeks.
The CBRT delivered on the market’s expectations of a simplification of its monetary policy framework on Thursday, and emphasized a commitment to bringing inflation down.
But asset prices across local rates and FX, sovereign hard currency and corporate credit have also rallied sharply this month, raising the question of whether bullish opportunities remain.
In this note we assess where attractive opportunities still exist in the Turkish fixed income space, to express a view that the macro-financial outlook will be on a stable-to-improving trend over the next few quarters.
Local markets: The local yield curve is already significantly inverted and offers little value at current levels, while the lira’s appreciation potential is capped by the urgency to re-build FX reserves. Position for grinding FX appreciation and falling volatility by entering 9m USD/TRY 1×2 put spreads (7.45; 7.05) at indicative cost of 1.20% of premium (spot ref: 7.56).
Sovereign credit: Non-resident buying could return with foreign holdings at 8-year lows. Bond curve looks ripe for more structural steepening. Enter curve steepener buying TURKEY 5.25 30 versus selling TURKEY 5.75 47, DV01-neutral.
Corporates: In a separate note, our corporates team have upgraded KCHOL, SISETI, TURKTI and TCELLT to OW. Investors should switch from hard currency earning credits to domestically focused ones and pick up 100-150bp in spread without compromising on balance sheet quality.
Banks: In a separate note, our corporates team have upgraded Turkish banks’ bonds to OW/N, with OWs concentrated in higher yielding senior and sub debt. Longer-dated seniors of ISCTR, VAKBN and TSKBTI offer the best value trading 140-150bp over the sovereign. In subs, we prefer AKBNK 27 and TSKBI 27, which benefit from higher yields and sub/sen ratio (to call), and have manageable extension risks.
From JP Morgan Europe Emerging Markets Research Report
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