Turkish lira bonds will flip from being the worst-performing local debt market in developing nations this year to the best in 2024, according to analysts at Deutsche Bank.
“It is still a few months too early to turn structurally bullish,” strategists led by Christian Wietoska wrote in a note. “We believe local bonds need to reprice another 200-400 basis points, but then offer value from a structural perspective.”
Deutsche Bank joins JP Morgan and a raft of big-name investors betting on a turnaround for the asset class that has seen billions of outflows in recent years amid political instability and government interference in monetary policy. The outlook was given another boost late last month when the central bank raised interest rates at a fifth consecutive meeting to 35% and dialed back regulations that had pushed local banks to hold more of the debt.
Inflation pressure, high issuance volumes and at least another 500 basis points of monetary tightening will lead to further weakness in the bonds until the end of the year, the Deutsche analysts said.
They recommended buying the lira against the dollar as “a better trade” until the yield on two-year notes reaches 40% and the yield on 10-year notes reaches 35%. The bonds traded on Monday at around 41% and 31%, respectively.
The central bank revised its inflation forecast at the start of the month to 65% by year-end, up from a previous forecast 58%, and predicted price growth will finish next year at 36%, up from 33%. The monetary authority expects inflation to peak at above 70% around May.
“High inflation means that ongoing nominal depreciation of the exchange rate is inevitable, but we expect the path to be more gradual next year and the following,” the Deutsche Bank strategists wrote.
The lira has lost about 35% of its value against the dollar this year, the worst performance among emerging-market currencies outside Argentina.
--With assistance from Beril Akman.
(Corrects that inflation forecast was revised in penultimate paragraph.)
