Turkey strikes at renewed yield hunt with 30-year bond

By bne IntelliNews April 10, 2013

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Leaping on investor appetite renewed by the stimulus action in Japan, Turkey went to the international market to sell $1.5bn in 30-year dollar-denominated Eurobonds on April 9.

Scrambling to take advantage of the refreshed hunt for yield, the Turkish bond is the longest-dated debt issue from Ankara for two years, Bloomberg reports. According to Reuters, sources reported that initial pricing guidance at 5% had tightened to give a final price of 4.95% by the end of the day. Turkey last appeared in the international bond market in January, when it raised $1.5bn from the sale of 10-year dollar bonds at a record low cost of 3.473%. The last long-term debt sale came in December, when it tapped an existing 2041 bond for $1bn.

After a stellar end to 2012 on the back of its first investment grade rating in 20 years, courtesy of Fitch Ratings, Turkish debt has struggled to keep up the pace in early 2013, as the emerging market bond rally seen in the final months of last year petered out. That pullback has come amidst suggestions that the US Federal Reserve and European Central Bank are ready to start pulling in the massive volume of liquidity they have pumped into global markets in their fight against the crisis.

The complex and confusing box of tricks being utilized by the Central Bank of Turkey hasn't helped give investors confidence either. Turkish lira bonds underperformed all other major emerging markets in March, amid skepticism that the central bank's measures to contain loan growth will work, Bloomberg reported.

However the Bank of Japan said last week it will boost debt purchases in an effort to battle deflation, sparking fresh demand for higher yielding assets. Dovish comments from Turkey's central bank have also helped reignite demand for the Turkish sovereign in April.

Yet the resumed wave of global liquidity is also sparking fresh concern over the Turkish central bank's efforts to contain spiking loan growth and speculative inflows. Bloomberg reported that the BoJ's action has sparked a furious lift in the carry trade as investors buy Turkish assets funded by the yen. That trade has seen the lira gain 1.4% against the dollar so far this month.

That appreciation then offers another challenge for keeping a lid on hot money inflows, which the CBT will likely try to meet with yet another selection of policy moves, in an attempt to relieve the upwards pressure on the currency without encouraging import demand.

Erste Bank analysts point out that that Turkey is already closing in on its 2013 borrowing target, and that the issue increases the likelihood of a rate cut from the central bank. "Turkey's external borrowing has now reached $4.2bn (including the pre-financing in December 2012) vs. the treasury's $6.5bn 2013 target," they write in a note. "The revival in foreign fund flows to Turkey strengthened the forex basket to 2.06 which brings the real effective exchange rate into the CBT's overvaluation zone and strengthens the likelihood of a policy rate cut at the MPC meeting next week."

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