Lira Bonds May Soar Higher If Turkey Proves Right on Inflation

(Bloomberg) -- Turkey’s soaring local bonds may rally even further if the central bank’s right about price growth.

Murat Uysal, speaking publicly for the first time on Wednesday since becoming governor, said inflation may fall almost 200 basis points by the end of the year to 13.9%. That’s down from the Ankara-based institution’s previous base forecast of 14.6%.

It spells good news for traders who have recently bought into Turkey’s debt market. Lira government bonds have returned investors 11% in dollar terms in July, despite President Recep Tayyip Erdogan controversially firing Uysal’s predecessor, Murat Cetinkaya, at the beginning of the month for being too hawkish in his view. The next best-performing local bonds in Bloomberg Barclays’s gauge for emerging-market local debt, those of Israel, have returned just 3.9%.

Turkish bond gains are largely down to investors being desperate for higher returns in a world plagued by $14 trillion of negative-yielding debt. Even after Uysal cut borrowing costs by 425 basis points last week, the nation’s real base rate stands at 4 percentage points, one of the highest globally.

Average real yields on Turkish bonds have now turned negative, according to data compiled by Bloomberg. But they’re still 15.5% in nominal terms, which is enough to entice significant inflows, especially with the world’s major central banks being dovish. A falling inflation rate would serve to make the trade that much more attractive.

To contact the reporter on this story: Paul Wallace in Lagos at pwallace25@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Srinivasan Sivabalan

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