Turkish sovereign bonds saw a sell-off in the past two weeks as the depreciation of the Turkish lira accelerated. The exchange rate reached its all-time high of TRY7.3 against the US dollar. This happened amid a largely positive sentiment for emerging market debt with the vast majority of EM sovereign bonds trading in the positive territory.
The Central Bank of Turkey (CBRT) did not respond in a conventional manner by hiking rates. Instead, a number of steps were made to curb excess liquidity. The regulator stopped providing liquidity to the primary dealers and has not offered 1-week repo facilities since Friday, 7 August 2020. BDDK, the banking regulator, eased requirements to the recently introduced asset ratio, which effectively pushed banks to lend more. All these steps are likely to reduce the supply of the lira and raise funding costs without formally increasing interest rates, a conventional approach that is highly unpopular with Turkish leadership. However, financial markets responded positively to the regulatory initiative: the currency stabilised and bond and equity markets bounced back on Monday, 10 August 2020, and continue to demonstrate positive dynamics.
The Turkish sovereign yield curve shifted up with the short-end widening c160bps and the belly trading 110-150bps weaker. US$-denominated bonds issued by Turkish companies closely followed the sovereign with yields shifting up 0.2%-1% across the board. As it often happens in Turkey, corporate bonds outperformed the sovereign during the sell-off, with most of the bonds moving further inside the sovereign curve (yield on corporate bonds lower than on the sovereign). The chart below shows how spreads over sovereign changed in the last two weeks. The companies with higher FX risks, ie those operating in the domestic market and earning their revenues in Turkish lira, have unperformed the companies with diversified revenues streams, hence the relatively weaker performance of telcos (TURKTI, TCELLT) versus the rest of the corporate bond universe.
Senior bank bonds underperformed both sovereign and corporate bonds with spreads over the sovereign mostly widening, while subordinated bank bonds widened the most during the recent sell-off.