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Turkey Money-Market Funds Face $2.9 Billion Push Into Lira Bonds

By Tugce Ozsoy and Inci Ozbek
Electronic boards display Turkish lira rates at currency exchange bureaus in Bodrum, Turkey, on Thursday, July 6, 2023. The lira has lost 28% of its value so far this year, the biggest decline among 31 major currencies tracked by Bloomberg, after the Argentine peso. (Moe Zoyari/Bloomberg)

(Bloomberg) -- Turkey’s new requirement for money-market funds to allocate at least 10% of their portfolios to government bonds is set to channel billions of liras into Treasury debt, driving up demand for the short end of the yield curve.

Given that such funds have combined assets of 1.18 trillion liras, the mandate means they will need to allocate about 100 billion liras ($2.9 billion) to government bonds. Currently, the securities make up less than 2% of the portfolios, according to Tufan Comert, global markets strategy executive director at BBVA in London. 

The move could help to ease the Treasury’s cost of borrowing, as rise in demand could lead to bull steepening in the yield curve — where short-term bond yields drop more sharply than long-term ones. The announcement has sent the country’s 10-year sovereign yield toward a fourth day of declines and the biggest monthly drop in a year. 

“While the rule primarily affects short-term bonds due to maturity constraints, the increased liquidity could also have a broader impact across the yield curve.” said Onur Ilgen, head of treasury at MUFG Bank Turkey in Istanbul.

The yield on Turkey’s lira government bond maturing in April 2025 fell by 75 basis points to 41.95% since Thursday, while the yield on the two-year benchmark bond declined 100 basis points to 40.26%. 

Money-market funds in Turkey primarily invest in highly liquid instruments with maturities of up to 184 days. Fund managers now face the dual challenge of re-balancing portfolios and sourcing the required notes in a constrained market. The Capital Markets Board announced the rule change on Friday, requiring compliance by the end of February 2025. 

“This will create substantial demand for short-term bonds or TLRef-indexed bonds that pay coupons quarterly,” Turgutalp Gunal, a portfolio manager at Azimut Portfoy in Istanbul, said referring to the Turkish Lira Overnight Reference Rate. However, the limited supply of such securities in the secondary market may prompt an increase in government-bond auctions, he added.

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