Turkey’s benchmark bond yield reaches high of 20%

Turkey’s financial woes deepened on Tuesday after an investor sell-off pushed the yield on its benchmark bond to a historic high of more than 20 per cent even as the country sought to extricate itself from a diplomatic clash with the US by sending a high-level delegation across the Atlantic.

The dispute between Washington and Ankara has also contributed to the Turkish lira’s fall to an all-time low this week.

Investors have signalled increasing concern over the stewardship of the economy under President Recep Tayyip Erdogan, particularly after the Trump administration’s imposition of sanctions last week on Ankara, its long-time Nato partner.

Pro-government Turkish media reported on Tuesday that the two countries had reached a “preliminary understanding on certain matters” concerning the sanctions, which the US imposed in response to the detention of an American pastor in Turkey on espionage and terrorism charges.

CNN Turk, a local broadcaster, said Mevlut Cavusoglu, Turkey’s foreign minister, had spoken to Mike Pompeo, US secretary of state, ahead of a trip by Turkish officials to Washington. The Turkish government said the delegation, which is reported to be led by the deputy foreign minister, was leaving on Tuesday ahead of a meeting on Wednesday.

In an emollient message on Twitter, the US embassy said that “despite the current tensions, the US continues to be a strong friend and ally of Turkey”.

The yield on Turkey’s 10-year local currency debt reached 20.09 per cent, Bloomberg data showed, before falling back slightly to 19.5 per cent in mid-afternoon trade in London. Three months ago, the yield, which has jumped as prices have dropped, was 13.9 per cent.

By mid-afternoon on Tuesday, the Turkish lira stood at TL5.247 to the dollar, compared with its record low of TL5.425 the day before. The currency has lost about 28 per cent of its value against the greenback since the end of last year.

“Turkey is going through its first currency crisis of the floating era,” Dani Rodrik, professor of international political economy at Harvard University, said on Twitter.

“All the previous ones were when the rate was fixed or managed, and hence unfolded much more quickly. This one is stretched over time and the government prefers to ignore it.”

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A note by Goldman Sachs warned that further lira depreciation could hit the health of Turkey’s banks, which previously were formidably capitalised. It added that if the currency fell to TL7.1 to the dollar it could largely erode their excess capital, Reuters reported.

In another sign of rising investor concern, a measure of the cost to insure Turkey’s debt against default hit its highest level on a closing basis since 2009. The five-year credit default swap spread reached 348 basis points on Tuesday, up significantly from 166bp at the end of last year, according to data from IHS Markit.

Some investors have been concerned by Mr Erdogan’s appointment of Berat Albayrak, his son-in-law, at the head of a strengthened ministry of finance. Mr Erdogan has also made repeated criticisms of high interest rates, amid perceptions that the central bank, which declined to increase rates at its last meeting despite the currency’s vulnerability, lacks independence.

The bank tweaked its policy on Monday to inject $2.2bn into the banking sector, a move that provided only temporary relief for the lira.

“We do not consider the Turkish central bank’s measure yesterday to be suited to take the pressure off the currency,” said Ulrich Leuchtmann, an analyst at Commerzbank, on Tuesday. “It clearly does not dare to hike interest rates or it is not allowed to do so any longer.”

Other Turkish assets have also taken a heavy blow in recent days. The BIST 100 gauge of stocks traded in Istanbul is down 2.2 per cent for August and 17.8 per cent for 2018. In dollar terms, the index is off almost 40 per cent this year, FactSet data show.

However, the country’s dollar-denominated paper fared better on Tuesday. The risk premium investors demand to hold the 10-year bond maturing in October 2028 — compared with the equivalent US Treasury — ticked up to 4.625 percentage points, from 4.583 points on Monday. It was issued in April with a spread of 3.37 points.