Turkey's Bond Market Boosted by Falling Inflation, Rate Cuts
Inflows into Turkey's bond market have surged as slowing inflation and prospects of policy easing attract investors. Five-year lira-denominated government bonds have seen yields decline by 295 basis points in January, while 10-year borrowing costs have fallen by 213 basis points, marking their steepest monthly drops since May 2023. The rally in two-year securities, with a yield decline of 247 basis points, is the largest since last May.
Turkey's central bank has implemented two consecutive rate cuts, initiating an easing cycle in December after nearly two years of inflation moderation. This has drawn investors, including foreigners, who have poured over $2 billion into the market since the start of the year.
Foreign funds like Abrdn Investments have shifted to a bullish stance, purchasing fixed-rate lira debt for the first time in over three years. Others, such as Ninety One Plc, are investing in longer-maturity debt to secure higher yields.
Turkey's inclusion in JPMorgan Chase & Co's GBI-EM Global Diversified Index, effective January 31st, is expected to attract further inflows from index-tracking funds.
"Turkish government bonds offer a compelling long-term investment opportunity," said David Austerweil of VanEck. "We expect the yield curve to continue shifting downwards as inflation falls and the central bank maintains its tightening stance."
According to BBVA SA's Tufan Comert, the so-called belly of the curve – bonds with five to seven-year maturities – is likely to attract significant investor interest. The Turkish central bank has cut interest rates by 45% and is predicted to implement seven more cuts in 2025. Inflation is forecast to end the year at 27%, although the central bank targets a rate below 21%.