(Bloomberg) -- Deutsche Bank strategists were among the most prominent voices declaring late last year that Turkish lira bonds would be one of the best investments of 2024, even as they entered the year cautious and underweight.
More than half a year later, they doubled down, going strong overweight in May, then saying the notes were extremely cheap and giving a stark recommendation in early July: “buy now or never.” Since then, lira bonds have been the second worst performers in emerging markets after Nigeria’s naira-denominated debt, losing 2% and extending year-to-date losses to almost 5%, according to data compiled by Bloomberg.
The central bank’s hawkish stance against sticky inflation and the government’s high rollover ratio left Deutsche Bank with calls that were, at the very least, a bit early, as fixed-income lira notes fell out of favor with overseas investors. That, however, could be about to change soon.
While the Turkish central bank held its policy rate at 50% for a sixth month on Thursday, it introduced a more dovish tone that some economists believe opens the door to interest-rate cuts later this year.
Turning Point
With easing now potentially on the horizon, fixed-rate lira bonds, which offer one of the highest yields in the world, may be popping up again on foreign investors’ radar screens. Immediately after the latest statement on rates, yields on 10-year, 5-year and 2-year notes dropped sharply, by 41 basis points, 106 basis points and 433 basis points, respectively.
Up to now, many overseas investors have favored more niche Turkish lira bonds linked to the country’s benchmark interest 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.
Kieran Curtis from Abrdn Investments is one of them. He said he remains unconvinced that it’s time to buy conventional lira bonds.
“I doubt I would change my mind,” Curtis said. “The risk of early cuts is that you get FX weakness and that feeds straight back into inflation. The Federal Reserve just cut and for sure that will put some moral pressure on TCMB,” he said, using the initials for Turkey’s central bank, and adding that more cuts from the US would ease pressure on the lira.
Deutsche Bank didn’t respond to requests for comment, instead directing attention to their latest report. The strategists said on Sept. 16 that they expect a “significant” rally in Turkish fixed-income debt over the next six months.
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