The Turkish Treasury sharply cut its domestic bond offers at auctions held on November 12 and November 13. The yields consequently fell markedly below market rates. The situation reminded veteran economists of Turkey’s 1994 economic crisis.
“This is a perilous method. Looks like nobody left at the Treasury remembering the 1994 crisis,” Orhan Karaca of monthly magazine Capital said in a tweet.
Ibrahim Turhan, a former central bank deputy governor and a former chairman of Borsa Istanbul, wrote on Twitter: “The Treasury’s move to cut domestic bond sales and to weigh on eurobonds would not seem to be a wrong step given lira borrowing costs. But it must be careful. Risks would boom if it keeps taking cosmetic steps in the absence of a stability programme that will permanently lower lira financing costs. Especially, the cost of face-saving decisions that would mislead the market and hurt predictability would be high in the medium and long-term. The year of 1994 is an example of how this truth was learnt at a fairly high cost.”
Tweeting part of an article he wrote in 2008, Turhan added:“Cancellation of four consecutive auctions in the last quarter of 1993 in turn enhanced the uncertainty in the markets, and the demand for T-Bills disappeared leaving the Treasury with the Central Bank short-term advances as its only domestic source to finance the budget deficit. The excess liquidity, which arose from monetization of debt, immediately transformed into a speculative attack on the domestic currency. The Central Bank, while trying to keep the interest rates at their artificially low levels, attempted to defend the exchange rate by selling foreign currency. As a result, the Central Bank lost half of its foreign exchange reserves. The turmoil in the markets continued as exchange rates started to rise at an unprecedented rate and the Turkish lira depreciated by 56.4% in four months. A stabilization program, later supported by an IMF Standby, was launched on April 5th, 1994.”
As a response to the Treasury’s expansionary moves, the central bank, meanwhile, cut its net funding to TRY118bn as of November 13 from TRY134bn a day ago. The central bank’s net funding stood as high as TRY155bn as of November 2.
“Not a good strategy”
“We will see how much of the total TRY17-18bn left in the market will be absorbed through [the central bank’s] open market operations. If the issue is to slash interest rates on deposits, not a good strategy,” Gizem Oztok Altinsac of Actus Portfoy said on Twitter.
The Treasury sold TRY1.13bn worth of 2-year fixed coupon benchmark bonds (re-open) at an auction held on November 13 versus TRY11bn worth of bids, the ministry said in a written statement.
It accepted TRY936mn of a total TRY9.27bn worth of non-competitive bids while sales to competitive bids stood at TRY202mn versus TRY1.75bn worth of competitive bids.
Consequently, the annual compound yield fell sharply to 18.79% from 25.98% at the previous auction held for the same paper last month.
“Possible developments in the distribution of non-competitive and competitive (sales) at the Treasury’s domestic bond auctions will determine the direction of interest rates at the end of the year. Hope excessive reserve usage will not be the case, new year will not be welcomed with limited reserves,” Hakan Ozyildiz, former deputy undersecretary of the Treasury, tweeted.
230bp below market rates
“The Treasury sold only TRY348mn to the market in total. The yield that emerged at auction is below 230bp of market rates. Of course, it is not possible to say that this much limited sale points to a healthy yield level. Freed liquidity could flow into 5-year/10-year bonds or FX,” an unnamed banker told Reuters.
“The 2-year auction sold at nearly 1.5pp better than market yield. Biggest auction-market yield gap since at least 2008. Sold only 179mn liras ($32mn) so probably only best bids were filled. Bid-to-cover: 8.9. 3 auctions cancelled and low sales yesterday,” Fercan Yalinkilic of Bloomberg said on Twitter.
On November 12, the Treasury sold TRY983mn (TRY900mn non-competitive sales plus only TRY83mn competitive sales) worth of 13-month zero coupon bills (new issue) versus TRY7.48bn of total demand (TRY 6.23bn non-competitive bids plus TRY1.26bn competitive bids). The annual compound yield on 13-month bills came in at 19.73%.
Also on November 12, the authority sold TRY978mn (TRY900mn non-competitive plus just TRY78mn competitive) worth of 5-year fixed coupon bonds (re-open) against TRY6.87bn worth of demand. The annual compound yield stood at 17.67%.
“Turkey sells record low amount of TRY70mn in 5-year auction, after cancelling 3 auctions this week. Consequently bid-to-cover hits 26, also the highest to date,” Yalinkilic said on November 12.
Total outflows from the foreign-held domestic government bonds stock amounted to $931mn in the year to date as of November 2, with $254mn worth of outflow registered in the week ending on November 2, according to the latest data from the central bank.
On November 9, the Treasury announced that it had cancelled a 10-year CPI-indexed domestic bond (re-open) auction previously scheduled for November 12 along with auctions for a 7-year floating coupon bond (re-open) and 10-year fixed coupon benchmark bond (re-open) scheduled for November 13.
Reduced financing needs
It cited reduced financing needs thanks to the government’s recent saving measures and €1bn worth of eurobond sales made on November 7.
The Treasury did not comment on whether it will hold a planned 2-year lease certificate (direct sale) auction on November 20.
According to the previously announced domestic borrowing strategy, the authority was planning to borrow a total of TRY22.4bn from the domestic market in November versus a debt redemption of TRY21.8bn. The heftiest debt redemption will be on November 14 at TRY19.5bn.
The Treasury expects total domestic borrowing this year will amount to TRYTRY132.4bn, down from the planned TRY134.3bn.
Turkey is planning to raise less cash through local-currency debt sales than it redeems for the first time since 2016, according to the Treasury’s 2019 borrowing strategy.
The country plans to borrow TRY153.9bn from the domestic market and redeem TRY164.6bn. That would take the debt rollover ratio to 93.5%, down from the expected 107% this year, and 126% in 2017.
The Treasury, meanwhile, plans to borrow $8bn on international markets in 2019.