Lira’s slump threatens Turkish corporate bonds
The lira’s slump this month threatens to derail a rally in Turkish corporate bonds that has handed investors some of the richest returns in Emerging Markets (EM).
The debt, offering returns of 4.4% in 2021, was the second worst performer in developing nations after President Recep Tayyip Erdogan sacked three central bankers last week (ended 15 October). As the lira tumbled, the average yield on Turkish company bonds surged to 4.87%, close to a six-month high.
Before then, Turkish corporate borrowing costs had largely resisted the impact of China’s Evergrande Group (3333 HK) crisis and rising concern about tapering by the US Federal Reserve, which curbed appetite more broadly for riskier EM assets.
Now, bondholders say the lira’s depreciation is too extreme to leave corporate debt untouched.
The lira plunged to record lows, extending this year’s depreciation to almost 20%, the worst among EM currencies. Erdogan – whose ruling AK Party has for decades based its electoral success on rapid levels of economic growth – argues that higher interest rates actually push up prices rather than the orthodox view that they contain them.
Rising geopolitical risks are also exacerbating the currency’s rout as Erdogan considers a military offensive into neighbouring Syria. – Bloomberg News.
The US Dollar Index slipped 0.23% to 93.734, the euro climbed 0.20% to USD1.1633, the pound gained 0.52% to USD1.3797, and the yen weakened 0.05% to 114.38 per dollar.
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