Economically embattled Turkey is leaning on local banks to buy more government bonds in debt auctions, three people with direct knowledge of the matter were cited as saying by Bloomberg on May 20.
The move will be seen by the markets as the latest sign of the government’s increasingly interventionist approach to policy making. The sources reportedly said that Turkish authorities asked some of the nation’s primary dealers to support the government’s borrowing drive last week. The banks, they said, were asked to bid for more bonds than they needed in their roles as market makers.
The development comes amid a substantial loosening of the fiscal purse strings. It has widened Turkey’s budget deficit, raised borrowing costs toward the highest level seen in a decade and deepened the already embattled Turkish lira’s depreciation. Investors, the news agency reported, said that instead of reining in spending to help steady markets, the government has been trying to impact market rates directly and often by turning to lenders.
Last year, officials began curtailing the supply of long-dated local-currency bonds even as Turkey’s borrowing needs ballooned, killing off liquidity in the market for benchmark securities. The government also piled pressure on state banks to extend cheap loans, hurting their profits.
Turkey’s annualised budget deficit widened past a record Turkish lira 100bn ($16.5bn) in April and the government’s immediate borrowing needs are growing. The Treasury is scheduled to borrow TRY11bm in June and TRY19.5bn in July, the most since February.
It’s unclear if the banks heeded the request from a senior official to buy more government bonds, but Bloomberg said the auction results provided some clues: the average simple yield offered for two-year government bonds sold on May 14 was 24.2%, almost 150 bp below the previous day’s close. The average yield accepted at the auction was 23.9%, and in the secondary market it has since climbed to 24.6%.
The yield on two-year local-currency debt surged more than 650 basis points this year, touching an eight-month high of 26.2% last week.
At TRY14.6bn, total borrowing for May was slightly below the government target of TRY15.9bn, data from the Treasury show. The Treasury sold TRY6.8bn to lenders in four separate competitive bond auctions on May 13 and May 14 and another TRY7.8bn through non-competitive sales.
Overseas investors have sold more than $2.6bn of local-currency government bonds this year, central bank data shows, bringing their share in the market to a record low of 13%. At its peak in 2013, that share stood at 28%. Outflows accelerated after the government orchestrated a liquidity squeeze in the offshore lira market in March to stem a rout in the lira. That forced some foreign investors to offload their holdings.
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