Record Inflows into Turkish Bonds Boosted by Positive Market Sentiment

Key Takeaway

• Foreign investors bought a record $5.5 billion in Turkish lira bonds over four weeks, driven by monetary orthodoxy and lower inflation.
• Non-residents' holdings of Turkish domestic debt have tripled this year to $8.2 billion, reflecting renewed investor confidence.
• Bank of America and Citigroup highlight the lira as a top investment, citing improved market sentiment and higher tourism revenues.

Record Inflows into Turkish Bonds

Foreign investors have significantly increased their purchases of lira-denominated Turkish government bonds, marking the largest monthly inflow into the country’s domestic debt on record. According to the latest central bank data, overseas investors bought a net $1.3 billion of the debt in the week through May 17, extending inflows over the past four weeks to $5.5 billion. This represents the biggest four-week inflow on record on a rolling basis, as calculated by Bloomberg, and has brought non-residents’ holdings of domestic debt to the highest level since February 2021.

The surge in foreign investment is attributed to recent pledges of monetary orthodoxy and lower inflation, which have bolstered investor confidence. The central bank's larger-than-expected interest-rate hike at its March meeting has also played a crucial role. A policy shift following last year's elections, which saw President Recep Tayyip Erdogan appoint a more market-friendly team of economic officials led by former Wall Street banker Mehmet Simsek, has notably improved sentiment among foreign investors.

Positive Market Sentiment

Bank of America strategists have recently highlighted the lira as the best bet among currencies in Eastern Europe, the Middle East, and Africa. They recommend investors buy lira forwards, citing higher summer tourism revenues as a factor that will boost the nation’s finances. Citigroup Inc. has also expressed optimism, stating that Turkish markets are on the verge of a “Renaissance moment” after years of near-zero foreign participation.

The amount of Turkish government debt in liras held by non-residents has more than tripled so far this year, reaching $8.2 billion as of the latest available data. This significant increase underscores the renewed confidence among foreign investors in Turkey's economic prospects.

Broader Emerging Markets Debt Activity

In other emerging markets, Chile is preparing to re-enter the international debt markets with a peso bond buyback, following a 6.2% rally in the peso driven by rising copper prices. The nation plans to repurchase global peso bonds due in 2025, 2026, 2028, and 2033. This move comes as Finance Minister Mario Marcel and Central Bank Governor Rosanna Costa are set to meet with investors in New York and Toronto next week.

Romania is nearing the completion of its foreign debt sale plan for the year, having already raised over $8 billion in dollar and euro-denominated notes from international markets in 2023. The latest offering includes bonds due in 2032 and 2037, with proceeds expected to fund the budget deficit, redeem public debt, and manage liabilities. Romania also plans to issue its first Samurai bonds in the coming months.

Ivory Coast has surpassed South Africa to become the best-rated sovereign in sub-Saharan Africa with foreign debt outstanding. S&P Global Ratings affirmed both countries at BB-, but Ivory Coast's outlook was upgraded to positive due to an improving debt profile. The yield on Ivory Coast’s debt maturing in 2028 fell to 7.09%, the lowest since April 15, while South Africa’s dollar debt due in 2030 was trading at a yield of 6.9%.

Street Views

• Bank of America Strategists (Bullish on the Turkish lira):

  "The lira was the best bet among currencies in eastern Europe, the Middle East and Africa, recommending investors buy lira forwards as higher summer tourism revenues boost the nation’s finances."

• Citigroup Inc. (Bullish on Turkish markets):

  "Turkish markets are on the verge of a 'Renaissance moment' after years of near-zero foreign participation."