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Rally on Turkish Bonds, Equities Extends

TURKEY
  • The rally on Turkey’s USD bonds has extended. Yields are down 6-14bps across the curve, which has steepened on the day. The move lower in yields marks an extension of the notable move on Friday when Erdogan named three new central bankers as part of the revamp of his economic team and pivot to more orthodox policy. The benchmark Borsa Istanbul Index has also rallied and sits 3.6% higher compared to Friday’s open.
  • Turkey’s 5Y CDS have also continued to decline, and last deal at 378bps – their lowest level since September 2021. Vice President Yilmaz said last week that he expects Turkish CDS spreads to decline ahead of the announcement of the government’s mid-term economic plan in September.
  • Nevertheless, high inflation, financing requirements and a large current account deficit may pose risks to the rally in bonds, some investors have warned. Moreover, the CBRT governor warned last week that inflation is expected to jump to 58% by year-end while reiterating that rate hikes will only be “gradual and stable”. Though USDTRY has remained stable since the July 20 rate decision, disappointingly small rate hikes going forward could pose risks to TRY and other Turkish assets.
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