(Bloomberg) — Slowing inflation and policy-easing prospects are luring bumper investment flows to Turkey’s bond markets, putting longer-dated debt on track for the best monthly showing in almost two years.
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Yields on five-year lira-denominated government bonds have slid 295 basis points in January, while 10-year borrowing costs are down 213 basis points, the biggest declines since May 2023. The rally in two-year securities is the biggest since last May, with yields dropping 247 basis points.
Turkey’s central bank has now cut rates two months in a row, having kicked off its easing cycle in December after a gap of almost two years as inflation gradually started to decline. That’s luring more investors, including foreigners who pumped more than $2 billion into the market since the beginning of this year, according to Bloomberg calculations based on central bank data.
Read: Turkey’s Inflation Slowed More Than Expected Last Month
The inflows signal a shift in the stance of investors, many of whom until recently preferred currency products or niche instruments such as floating-rate debt.
Abrdn Investments is among the foreign funds to have turned bullish, buying fixed-rate lira debt for the first time in more than three years. It made the move in December just before the central bank cut rates. Others such as Ninety One Plc are betting on longer-maturity debt as they look to lock in high yields for more years.
Turkey’s weighting will also increase in JPMorgan Chase & Co’s GBI-EM Global Diversified Index, the benchmark for local-currency debt. The change, which takes effect Jan. 31, could attract more inflows from index-tracking funds.
“If Turkey can stick with the current orthodox policy path for the foreseeable future, the 10-year part of the Turkish government bond curve at 25.25% will end up being a very good long-term investment,” said David Austerweil, deputy portfolio manager at VanEck. The firm is overweight on both Turkish local bonds and FX, with roughly equally weighted positions in the 5-year and 10-year points on the Turkish government bond nominal curve, Austerweil said.
“As the fall in inflation continues and the Turkish central bank maintains its tight stance, we expect the yield curve to continue shifting downwards as a whole,” said Tufan Comert, an emerging market strategist at BBVA SA in London.
