Saturday, August 8, 2009

On last week's Hurriyet column

It turns out I made quite a good call with my bond outlook last week, but that wasn't really rocket science after the Inflation Report. I am on vacation and too lazy to write my own thoughts, so I am just copy pasting a well-written FT article on this week's incredible rally. BTW, if you have been following my columns, you already know where I stand, but from those interviewed, I am more or less close to Murat Ucer's view. Anyway:

Bond boost for Turkish Treasury By Delphine Strauss in Ankara Published: August 5 2009 17:49 | Last updated: August 5 2009 17:49Yields on Turkey's sovereign bonds fell to an historic low this week as investors took advantage of extreme dovishness from its central bank and a return of risk appetite in emerging markets.The rally helped the Turkish Treasury sail through some of the heftiest debt refinancings it faced this year.But economists warn that central bank policy will not be sustainable unless Ankara rapidly commits to credible fiscal retrenchment.The Treasury successfully borrowed TL10.8bn ($7.4bn) in non-competitive sales and auctions of 21-month and five-year bonds.It had already placed Treasury-bills totalling TL5bn on Monday at a compound rate of 9.54 per cent.Yields on the benchmark 21-month bond dipped below 10 per cent for the first time ever after the auctions, which have taken the Treasury much of the way towards its target of borrowing TL17.3bn in August, against redemptions of TL17.4bn.Yields on the JPMorgan Government Bond Index-Emerging Market Turkey reveal a dramatic drop from 24.6 per cent last October to 10.4 per cent this week.The smooth sales mean government borrowing "has become a non-issue for financial markets", said Ozgur Altug, analyst at BCG Partners in Istanbul, who noted that the Treasury had hoarded foreign exchange reserves ahead of the redemption period.The exuberance extends to equity markets.Istanbul's main share index hit a fresh 17-month high this week after an extended rally erased not only the losses sparked by the global crisis but also some of those sustained in political instability earlier last year.But bond investors, above all, are responding to unequivocally dovish signals from Turkey's central bank, which has already cut interest rates by 850 basis points since November.The bank took markets by surprise last week with a quarterly inflation report suggesting it expected to cut rates further and then hold them throughout 2010.Christian Keller, economist at Barclays Capital, said this week's data showing inflation had eased as low as 5.4 per cent could encourage the bank to cut its benchmark borrowing rate a further 100bp or more in the coming months.That will take monetary policy into uncharted territory in a country with a history of repeated economic crises, double-digit inflation and currency collapse that forced the central bank to keep interest rates among the world's highest to stem capital outflows."If [the central bank ] has help from the government, they'll come out of this crisis as a developed market . . . They want to reduce the differential between Turkey and other markets," Mr Altug said.But for its policy to be sustainable, Turkey's government will have to deliver on promises to restore fiscal discipline, after a year of rapidly widening budget deficits, say many economists.Officials are working on what some commentators consider to be more realistic medium-term fiscal plans, but many doubt they will be enforced unless Turkey accepts International Monetary Fund policing.Some think the central bank is taking risks in pre-empting any commitment to long-delayed fiscal reforms."I think it's sustainable for another month or so. Global risk appetite is back, and no one has the luxury of shunning Turkey for problems that may emerge in November and December. But I find the central bank's approach very puzzling," said Murat Ucer, Istanbul-based analyst for the consultancy Global Source."It is clear that this extreme easing will have to be removed at a point in the not so distant future," said Ahmet Akarli at Goldman Sachs, noting that most "healthy" emerging market central banks were becoming nervous about exit strategies.Erhan Aslanoglu, economist at Marmara university in Istanbul, also says the central bank may be too optimistic in its assessment of how long disinflation will continue.But he says it may still achieve a lasting reduction in Turkey's historically punishing domestic borrowing costs."There may be a new equilibrium – not as low as it's going to be by the end of this year, but not as high as before the crisis."
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