The Kapali Carsi

Another Turkish yield curve inversion

The Turkish yield curve inverted again yesterday (January 21), and it was still inverted today.

I already discussed in detail how to interpret a yield curve inversion, generally as well as specifically for Turkey, during the latest inversion two weeks ago, so I’ll skip the introduction and just explain what this means. This inversion is similar to the one two weeks ago in the sense that the rise in the benchmark two-year bond was accompanied by the decline in the ten-year one. This suggests that: 1. There was some tightening expectations play going on. 2. Money was moving out of 2-year into 10-year instead of out of Turkish bonds altogether. This makes sense, as markets were expecting the Central Bank to announce additional monetary tightening (AMT) days after the rate decision.

Interestingly enough, the difference between yields on the two bonds has been falling since the graft scandal erupted in mid-December. However, the reasons behind the fall have not been the same: In the second week of December, both rates were rising, with the two-year obviously more than the ten- year. Investors were moving away from Turkish assets at the time, and so this looks like a case of politically-induced risk aversion.

In contrast, both rates were falling in the first days of January. There was nearly a billion (USD) into Turkish bonds that week. Then, we were back to the world where yields on both were rising. And as I mentioned above, the ten-year started falling in the last couple of days, causing the inversion.

In other bond news, there was a lot of demand for Turkey’s 10-year sovereign (hard currency) bond sale today. The yield was high (5.85 percent, compared to 5.4 percent in secondary), but still impressive. But I wouldn’t make too much of it, as it reflects the hunt for yield and general demand for emerging market hard currency debt early in the year so far- more than positive sentiment on Turkey…

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