Turkey’s bonds, lira remain under pressure as market awaits monetary signals; LatAm poised

By Rebecca Melvin

New York, Aug. 8 – Turkey’s currency and dollar bonds remained under pressure on Wednesday as market players continued to watch for signs from Turkish authorities that there is a plan in place to improve the troubled economic situation there.

Higher interest rates are deemed a necessary check to inflation, but the central bank missed an opportunity last month to lift rates.

“The silence is deafening,” CIBC’s Jeremy Stretch, head of strategy, Europe, told Prospect News. Other than a modest attempt to stabilize the lira through liquidity measures on Monday, the Turkish authorities remain silent, Stretch said.

On Monday, the Turkish central bank lowered the foreign exchange markets reserve requirement limit to 40% from 45% to stabilize the currency.

On Wednesday, the lira stood at 5.28 per U.S. dollar, having receded from 5.36 on Monday but still well above 4.90 on Friday. The currency has dropped about 40% year to date.

Market players will be watching fund flows data on Thursday to get a read on the health of the bond market, Stretch said. Bonds hit a record low on Tuesday, which pushed the yield on the 10-year bond up to 20%. There was subsequently a small bounce back, but on Wednesday, the pressure was a little heavier again, with Turkey’s 5 1/8% notes due 2028 down 0.21 point at 84.55.

Turkey’s 6 1/8% notes due 2028, of which $2 billion priced earlier this year, were down to 90.00, which was off 0.2 point on the day.

But Turkey’s 4¼% notes due 2026 were 82.35, which was up ¼ point.

The market is continuing to test the resolve of the authorities and keeping the currency under stress, although it has not taken back the highs, and bond yields are higher, Stretch said.

“There is the ongoing question of credibility given the monetary environment and inflationary backdrop, and whether the authorities have the tools to push against that with any degree of credibility remains in doubt,” Stretch said.

Investors will also be watching macro data including inflation. “What the market wants to know is whether the central bank can run monetary policy in a manner deemed prudent” given the Erdogan government’s stated commitment to keep interest rates low, Stretch said.

Nevertheless, it is not only the Erdogan government’s monetary policy that is in question, the United States’ diplomatic dispute with Turkey and subsequent talk of trade tariffs have added “a layer of complexity,” and a related issue is Turkey’s potential involvement in energy-related business with Iran, Stretch said. “It’s a troubling back drop.”

Elsewhere, emerging markets are mostly quiet. In Latin America, the debt capital markets are expected to remain quiet for the rest of August after a slow July. A pickup in activity in September is expected, but it is uncertain how strong the new issue market will be.

“We will have to see what the Fed is going to do in September, and go from there,” a New York-based market source, focused on Latin America, said.

The U.S. Federal Reserve’s Open Market Committee will meet in September to update its monetary policy.

In addition, uncertainty over trade remains a concern. The Trump administration completed plans to impose tariffs on an additional $16 billion of Chinese imports on Tuesday, with penalties expected to take effect Aug. 23 and bringing the total amount of Chinese goods covered by the tariffs to $50 billion.

Also on Tuesday, U.S. sanctions against Iran restarted, targeting U.S. dollar financial transactions, Iran’s automotive sector and the purchase of planes and metals including gold.

© 2015 Prospect News.
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