Turkish bond attracts keen interest despite concerns

• Second issue of eurobonds
• Heavily oversubscribed
• UK and US investors dominate

Ankara’s second issue this year of dollar denominated eurobonds was heavily oversubscribed, attracting domestic and international investors, according to the Turkish ministry of treasury and finance.

When the $2 billion bond, with a seven-year maturity, was issued on Wednesday the order book was oversubscribed two and a half times, with buyers drawn by the 7.25 percent coupon, the ministry said.

UK and US investors dominated the offer – Turkey has been a popular play by international financial institutions in the so-called carry trade –  combining to account for 68 percent of the paper sold, with local buyers taking a further 15 percent. 

The latest issue took the Turkish treasury’s total offerings on the market to $4.5 billion so far this year. An earlier $2.5 billion bond – again with a seven-year term – offered investors a lower coupon of 7.2 percent.

The higher rate of the latest offer reflects increased concerns about ongoing political instability, according to analysts.

Tight monetary policy

The bond issue came as central bank governor Fatih Karahan said he was maintaining his year-end consumer inflation guidance at 24 percent, though he acknowledged there was a rise in upside risk.

The bank will maintain its tight monetary policy to reinforce the government’s disinflationary stance, by suppressing domestic demand, Karahan said. He signalled a continued hold on interest rates, which resumed their upward momentum in April after a series of cuts that began in December. The bank’s main lending rate currently stands at 46 percent. 

The bank still has some way to go to meet its 24 percent target. April’s inflation rate was 37.9 percent, marginally down from the 38.1 percent posted the previous month, according to the Turkish statistical institute. 

The bank’s forecast also puts it at odds with major international ratings agencies such as S&P and Moody’s, which are predicting that Turkey will close out 2025 with an inflation rate of 30 percent or more. 

Though maintaining its outlook, Karahan said the bank felt inflationary pressures had the potential to increase, “due to the recent rise in uncertainties”. 

Those uncertainties will likely undermine the central bank’s objective, according to economist Mustafa Sönmez.

“Market expectations, which are more realistic, indicate year-end inflation of 30 percent, far from the bank’s set target,” Sönmez told AGBI. 

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Political uncertainty stemming from the arrest in March of İstanbul’s mayor Ekrem İmamoğlu – a leading opposition figure – is playing a major part in market pricing and is stoking economic pressures, Sönmez said. 

“The key in derailing their [the central bank’s] set targets now is politics,” he said. “The events of March 19 had a negative impact on their economy targets and the main question going forward is will there be more March 19s ahead?”

İmamoğlu’s detention and subsequent arrest on charges of corruption briefly resulted in the lira falling 12 percent and the main stock exchange index 7 percent. 

While both have clawed back much of those losses, the lira is again edging down. It is currently trading at close to 39 to the dollar and a far weaker 44 to the euro, as a new wave of arrests of Istanbul municipality officials has sparked further protests.