With the normalization and simplification policies, market experts’ emphasis that bonds would be the first entry point for foreign investors started to be reflected in the data. Following the 2-year bond auction, yesterday’s 10-year bond auction also attracted record demand. Bond interest rates are also falling with foreign demand.
After the elections, the confidence that started to rebuild with the policies implemented by the new economy and the Central Bank management, and the 5-year bankruptcy risk premium CDSs, which fell, enabled foreign investors to turn their attention to Turkey and TRY assets again. It is expected that the first investment instrument to be entered by foreign investors, who have made an outflow of USD 70 billion from TRY assets in the last 4 years, will be government domestic debt securities.
Indeed, the events of the last few weeks indicate that foreign inflows have started and the rest will follow. While foreign demand for the two-year bond auction held the previous day was intense, yesterday’s 10-year bond auction attracted record demand. The average compound interest rate in yesterday’s 10-year bond auction was 26.87 percent. In the market, the 2-year benchmark bond interest rate fell below 40 percent, the 5-year benchmark bond interest rate fell below 30 percent, while the 10-year benchmark bond interest rate fell sharply to 26.64 percent.
An inflow of USD 500-600 million last week
According to banking sector sources, international investment bank JP Morgan added two government bonds to its bond index last week. This led to an inflow of USD 500-600 million. This data will be seen in the Central Bank’s weekly securities data to be released tomorrow. In addition, there was a very high foreign investor demand for the two-year bond auction held on Monday. The demand also affected 10-year bond yields before yesterday’s auction. Thus, all benchmark bond yields declined. The 2-year benchmark bond yield fell by 153 basis points and the 10-year benchmark bond yield fell by 90 basis points compared to Friday. The 2-year benchmark bond yield dropped to 38.34 percent.
Record demand for 10-year bonds
The 10-year benchmark bond yield hit new records yesterday. The demand of banks was TRY 37 billion 388.2 million in sales to non-competitive bids before the auction. Before the 10-year bond auction, net sales of TRY 5 billion were made to the public and TRY 10 billion to primary dealer banks. Net sales in the auction amounted to TRY 14.55 billion. Together with the Auction and Non-Competitive Bidding sales, total sales in the auction reached TRY 29.55 billion. The average compound interest rate in the auction was 26.87 percent. In the previous 10-year bond auction, the average compound interest rate was 31.98 percent.
December borrowing target exceeded
Prior to yesterday’s 4-year TLREF-indexed bond auction, there were no sales to the public banks, while TRY 5 billion net sales were made to market makers. The net bid amount of the primary dealer banks was TRY 15 billion 901 million. In the auction, TRY 8.43 billion were sold and the periodic interest rate was 7.91 percent. Thus, the Treasury reached TRY 42.98 billion in yesterday’s two auctions. In the previous day’s 2-year bond auction, net sales were TRY 14.6 billion. With TRY 57.58 billion sold in two days, the Treasury far exceeded its December domestic borrowing target of TRY 45 billion.
Share of foreign investors in bonds below 1 percent
According to Central Bank data, the share of foreign investors in government bonds stood at 0.93 percent as of November 24. This is so far below past levels that market experts find it difficult to estimate how much inflows could be expected. An informed banking source said that the foreign share in bonds below 1 percent is a sign that there is still a long way to go, while another market expert reminded that foreign inflows have been observed on the bond side for the last 4 weeks, albeit small. The same expert emphasized that the decrease in the Central Bank’s need for foreign exchange sales also points to foreign inflows, thus the Central Bank can accumulate reserves, and stated that foreign inflows will continue with the effect of economic policies.
Capital inflows accelerated
Former CBRT chief economist and Bilkent University Faculty Member Prof. Dr. Hakan Kara stated in his post on social media that the CBRT has purchased USD 5.6 billion of foreign currency in the last two weeks and wrote, “Since there was no period of current account surplus, we can infer that capital inflows accelerated. It is probably due to foreign swap inflows.”
Orkun Godek, Deputy General Manager of Strategy and Research at Deniz Investment, points out that interest in both auctions and the secondary market has increased. “In addition to the tightening monetary policy, the steps taken by the Treasury on the fiscal balance side open the playing field for the re-established communication mechanism with foreign investors to bear fruit. As a matter of fact, foreign demand for bond auctions and subsequent interest in the secondary market has increased, while the reinforcement of the idea that the Turkish lira will trade relatively better than the path implied by forward exchange rate levels arouses a renewed sense of curiosity on the foreign investor front” Godek said.
According to bankers’ calculations, the Central Bank’s total reserves exceeded USD 140 billion last week, reaching a new historical high. Bankers’ calculations show that the increase in total reserves from June to last week reached USD 41.5 billion. CBRT’s net reserves excluding swaps improved from minus USD 51 billion to minus USD 46.5 billion last week. Bankers calculated a decline of about USD 1 billion in international net reserves last week. According to this calculation, net reserves declined from USD 35.81 billion to USD 35 billion last week.
