Turkey Bonds Extend Slump on Concern Row With U.S. Is Escalating

(Bloomberg) -- Turkish government bonds extended losses amid concern that a diplomatic spat with the U.S. over a detained American pastor in Turkey is escalating.

The yield on 10-year debt jumped as much as 45 basis points to an all-time high of 18.86 percent after Sabah newspaper reported that a Turkish court rejected an appeal by lawyers for Andrew Brunson to be released and for his travel ban to be lifted. The U.S. is threatening imminent sanctions on Turkey should he not be released.

Turkey won’t bow to threats and will retaliate if the U.S. decides to impose sanctions, President Recep Tayyip Erdogan’s spokesman Ibrahim Kalin said in Ankara. Brunson’s almost two-year detention has become the latest flashpoint in a crisis brewing between the NATO allies, and stands to deal another blow to Turkey’s already fragile economy. With a current-account deficit that’s one of the widest among emerging markets, the nation remains particularly exposed to shifts in investor sentiment and any slowdown in capital flows.

“It looks like U.S.-Turkey relations will remain on the rocks,” said Win Thin, a strategist at Brown Brothers Harriman & Co. in New York. “The U.S. has threatened sanctions. Let’s see what they deliver. Either way, negative for the lira at a time when it’s already very vulnerable.”

The lira could fall to an all-time low of 5 per dollar in coming days, Thin said. It fell 0.5 percent to 4.9083 per dollar as of 12:01 p.m. New York time, extending a more than 20 percent slide this year that has sent it to successive record lows and fueled double-digit inflation.

Turkey’s central bank on Tuesday acknowledged it won’t meet its 5 percent inflation target for three more years, disappointing investors who took it as indication that policy makers will put a premium on stimulating economic activity rather that taming consumer-price growth.

©2018 Bloomberg L.P.