Lira Rebounds From Record Low as Turkish Bonds, Stocks Decline

(Bloomberg) -- The lira rebounded from a record low as some investors judged its losses excessive, while Turkey’s bonds and stocks slid for the third day on concern authorities weren’t prepared to act to avoid a hard economic landing.

The local currency’s recovery was helped by close to $700 million in foreign-currency sales by local retail investors, according to an Istanbul-based trader who asked not to be identified because the person is not authorized to talk to the media. Yields on 10-year government debt jumped to an all-time high of 18.85 percent, taking increases in July alone to more than 200 basis points.

Turkish assets came under renewed pressure this week after President Recep Tayyip Erdogan replaced market-friendly ministers and appointed his son-in-law as the chief economic policy maker, fueling concern that authorities may not scale back stimulus that led to runaway inflation and bloated deficits. Investor sentiment worsened after AHaber television cited Erdogan as saying interest rates would fall. It wasn’t clear what rate he was referring to.

“Until the markets see some evidence of monetary orthodoxy being re-established, the pressure on Turkish financial assets will persist,” said Julian Rimmer, a trader in London at Investec Bank Plc. “While hard landing fears are pronounced, averting a currency crisis and capital flight is the priority at present.”

Turkey’s Treasury and Finance Minister Berat Albayrak said speculation over the central bank’s independence and decision-making mechanism was “unacceptable,” according to state-run Anadolu Agency. The policy maker would do whatever market conditions require, he was cited as saying.

Inflation, Debt

Turkish markets remain particularly vulnerable to shifts in broader investor sentiment given the nation’s large external financing needs, and have been among the hardest hit by an emerging-market sell-off this year. Inflation is running at more than three times the official target and companies that have borrowed heavily in foreign currency are strained, raising concern over a growing pile of bad debt.

Even so, Erdogan -- who holds the unorthodox view that higher rates fuel inflation -- has in the past pressured the central bank to refrain from raising borrowing costs and commercial lenders to offer mortgages at below-market rates. Private banks also have to share the burden, not just public ones, AHaber cited Erdogan as saying on Wednesday.

Lira, Bonds

The lira was 1.6 percent stronger at 4.8011 per dollar as of 12:58 p.m. in Istanbul, after sliding to an all-time low of 4.9743 in earlier trading. It’s this week’s worst emerging-market performer with a 4.7 percent loss.

The yield on the nation’s 10-year government bonds jumped as much as 37 basis points to 18.85 percent, before pulling back to 18.59 percent. The Borsa Istanbul 100 Index of shares was 0.4 percent lower, and down almost 8 percent for the week. It slid as much as 2.3 percent earlier Thursday. The Borsa Istanbul Banks Sector Index was almost 2 percent higher, after rebounding from an earlier decline of as much as 0.8 percent.

The central bank has raised rates by 500 basis points since April to help stem the market rout in local markets, but investors remain worried that policy makers are more keen to stimulate growth at the expense of financial stability. The central bank next meets July 24 and the swap market is pricing in about 100 basis points of monetary tightening over the next year.

To contact the reporters on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net;Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma, Neil Chatterjee

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