Azernews.Az

By Bloomberg

The prospect of slowing Turkish inflation is no longer enough to entice some traders to the nation’s bonds.

Ten-year lira yields jumped 1.25 percentage points in February, the securities’ worst result since June 2013, even as the central bank cut rates for a second straight month and consumer-price growth slowed to the least in more than 1 1/2 years in January. The Turkish bond rally that started in October is showing signs of “exhaustion,” according to Luis Costa at Citigroup Inc.

The lira weakened to a record 2.5149 per dollar this month as President Recep Tayyip Erdogan stepped up his criticism over the pace of interest-rate cuts, asking on Wednesday if policy makers are taking orders from somewhere else. Foreign investors sold a net $736 million of the nation’s local-currency debt this month through Feb. 20, on course for the third straight month of outflows, central bank data on Thursday showed.

“It’s too late to trade lira bonds positively just because of falling inflation,” Costa, chief strategist for eastern Europe, said by e-mail from London on Wednesday. “We might be in a funny environment where the government hammers policy rate cuts but the markets respond to that with rate sell-offs.”

While inflation has now slowed by more than two percentage points from last year’s 9.7 percent peak in May, it won’t fall much further in 2015, according to the central bank’s February survey of economists and businessmen, which showed year-end expectations at 6.77 percent.

Erdogan Attacks

The central bank expects core-price growth will continue to decline, yet a more persistent reduction in consumer inflation “necessitates a cautious approach,” policy makers said in a statement accompanying their Feb. 24 rate cuts. Future decisions will be conditional on the improvements in the inflation outlook, it said.

Oil, a main contributor to slowing Turkish inflation, has rebounded with Brent crude rising 37 percent since touching a six-year low $45.19 a barrel on Jan. 13. Turkey imports more than 90 percent of its oil and about 70 percent of its total energy needs, government data show.

Going against economic orthodoxy, Erdogan has said he believes the way to slow inflation is to cut borrowing costs. On Wednesday, he questioned the central bank’s loyalty, asking “is some other place taking these people under its influence?”

Currency Risk

“This noise will continue leading up to the June elections; we reckon only interest rate levels around 5 percent would satisfy” the government, Simon Quijano-Evans, head of emerging-market strategy at Commerzbank AG, said in an e-mailed note to his clients Thursday. “And since we do not see rates falling this low, we think that markets will have to move forward assuming increased risk premium.”

Turkey holds parliamentary elections on June 7.

The central bank lowered the benchmark one-week repurchase rate by 25 basis points to 7.5 percent this week, bringing the increase since last month’s cut to 2.5 percentage points. The bank also reduced the overnight lending and borrowing rates, the first time it cut all three rates at the same meeting in 22 months.

Ten-year government bond yields rose 17 basis points on Wednesday, taking the increase since the January rate cut to 1.12 percentage points, the most after the Brazil among 24 emerging markets tracked by Bloomberg.

“If you look ahead, the economics and the politics seem to point to an environment in which lira yields stay high and perhaps drift higher,” Neil Shearing, chief economist at London-based Capital Economics Ltd., said by phone on Wednesday.