(Bloomberg) -- Turkish lira bonds have sharply declined this month, with yields surging after weak local demand in auctions.
The yield on 10-year lira bonds remained above 29% on Tuesday after hitting a record high at that level on Monday. The curve has shifted higher across all maturities this month as local lenders pulled back their purchases.
The reticence to buy was attributed by traders to high supply pressure and expectations that Turkey’s central bank will be slow to cut interest rates. Turkey’s local-currency bonds are the worst performers in emerging markets this month after Israel.
Turkey also borrowed less than planned in September, with the Treasury and Finance Ministry selling about 146 billion liras ($4.3 billion) in debt across seven auctions this month, compared with 177 billion liras planned. Still, the rollover ratio of lira-denominated debt last month was above 200%, according to official data, adding oversupply pressure to prices.
“Traders realized that the easing cycle won’t be quick and aggressive,” said Evren Kirikoglu, a strategist and founder of Orca Macro. “Bond prices were pricing a September cut which was a baseless expectation. Oversupply is also not helping.”
Overseas investors, on the other hand, have begun to favor bonds indexed to the country’s policy rate, known as TLREF-indexed notes, because they provide a compound yield almost 20 percentage points higher than fixed-rate papers of the same maturity.
The central bank held its policy rate for fifth month in August while sending hawkish signals for upcoming meetings. The monetary authority last raised rates in March, by 500 basis points, in a bid to tame inflation. Its next meeting is on Thursday.
Deutsche Bank said in a report on Monday that a “delayed” rally in lira bonds was finally set to start. The lender’s strategists, who have been bullish on Turkey’s bonds this year, said recent improvements in inflation haven’t yet been reflected in debt prices and that a delayed monetary easing cycle may be positive for Turkish fixed income.
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