Page 84 - TURKRptJun19

The challenge is to find the government’s ‘invisible hands’ in the chart.
Turkish bond yields rise as analysts worry central bank is close to losing control of the market. Yields on Turkish global bonds jumped as political tension over the decreed Istanbul election rerun unsettled investors. Analysts at Raiffeisen International (RZB) said they were worried that Turkey’s central bank was losing control of the market and were calling for an emergency rate hike which they said could come this week or next week. “[Turkish government bonds] remain under selling pressure as dwindling market confidence sends yields north,” financial analyst Gintaras Shlizhyus of RZB said in a note on May 9. “Turkey’s central bank (TCMB) would need to hike rates if it wants to restore the market stability.” Political tensions between the opposition Republican People’s Party (CHP) and the ruling Justice and Development Party (AKP) were rising after the CHP narrowly won the end-of-March mayoral contest in Istanbul only to see the result cancelled by the High Election Board (YSK) and a re-run organised for June 23. Yields on Turkey’s two-year bonds jumped 133bp on the news of the cancellation of the poll result and those on the 10- year bonds soared 77bp. “With 2s10s spread climbing to 352bp and a 261bp jump in the three-month TRY NDF implied yield we believe that the market is beginning to price-in an emergency rate hike,” Shlizhyus said on May 8. “Positively 3-month NDF implied yield fell by 99bp and a yield on the 1-year contract was down 85bp. Still, a bearish curve flattening for [Turkish bonds] with long-end sharply up and short-term under upward pressure too could be indicating that TCMB is losing its grip on the market. This adds to our arguments for an emergency rate hike which, in our opinion, could come as early as this or next week,” Shlizhyus said. The decision to cancel the Istanbul election has unnerved the market and as bne IntelliNews argued in a recent op-ed, “TURKEY INSIGHT: Democracy? That died long ago. Economic recovery? Don’t bet the farm on it”, Turkey’s fading democratic credentials have been called into question. The instability introduced by the Istanbul debacle will also set back the Turkish economic recovery from last year’s currency meltdown. “The plummeting lira and high volatility are invoking larger concerns about the inflation outlook going forward notwithstanding the lower April figure. In this situation TCMB needs to strengthen anchors including liquidity tightening measures and the rate hike possibility,” Shlizhyus said. RZB is calling for an emergency rate hike of 200-300bp that analysts also see as unlikely given Turkish President Recep Tayyip Erdogan’s aversion to rate hikes as a result of his unorthodox monetary policy views.
Bonds now “cheap”. Slowing Turkish inflation has helped to make the country’s lira-denominated government bonds “cheap” for the first time this year, Christian Wietoska of Deutsche Bank said on May 3 following the inflation data release for April, according to Reuters. The German bank’s models pointed to potentially stellar gains ahead, Wietoska and analytical colleagues added. Deutsche noted that for the first time this year the 10-year local currency bonds were in fact cheap in Deutsche’s bond valuation model. The Deutsche model’s ‘fair value’ for government bond yields was now 19.10%
84 TURKEY Country Report June 2019 www.intellinews.com