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Foreign Investors Pour $2.8 Billion into Turkish Bonds, Boosting Confidence

Foreign investors buy Turkish bonds at record pace since 2013, driven by economic reforms and aggressive rate hikes to 50%.

By Athena Xu

5/16, 10:19 EDT
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Key Takeaway

  • Foreign investors bought $2.8 billion in Turkish bonds, the highest weekly inflow since 2013, signaling renewed confidence.
  • Erdogan's economic reforms and a significant interest rate hike to 50% from 8.5% have reduced Turkey's sovereign risk premiums.
  • Central bank's aggressive rate hikes aim to stabilize the lira and curb inflation, boosting investor optimism in Turkish government bonds.

Surge in Foreign Investment

Overseas investors have significantly increased their purchases of Turkish government bonds, marking the most substantial weekly inflow since 2013. According to central bank data, capital flows into Turkey’s lira-denominated bonds reached $2.8 billion in the week through May 10. This surge has elevated non-residents' holdings of domestic debt to the highest level observed since September 2021, indicating a renewed confidence in the Turkish economy among international investors.

Policy Shifts and Economic Reforms

The uptick in foreign investment follows a series of economic reforms and policy shifts initiated by President Recep Tayyip Erdogan's administration. After the elections last year, Erdogan appointed a market-friendly team of economic officials, including former Wall Street banker Mehmet Simsek. This new economic team's approach has been markedly different, with the central bank raising its policy rate dramatically to 50% in March from 8.5% in June 2023. These measures have contributed to a decrease in Turkish sovereign risk premiums and have been met with upgrades from global ratings firms, signaling a shift towards monetary orthodoxy and an effort to combat inflation.

Inflation and Interest Rate Hikes

The central bank's decision to implement a larger-than-expected interest-rate hike at its March meeting has been a key factor driving the recent influx of capital. This move is part of a broader strategy to stabilize the Turkish lira and curb inflation, which has been a significant concern for the economy. "With inflation nearing its peak and likely to reach its inflection point over the next several months, we have a bullish view on Turkish government bonds across the curve, over both the short and medium terms," stated Phoenix Kalen, head of emerging-market research at Societe Generale London Branch. This sentiment reflects a growing optimism among investors regarding the potential for Turkey's economic stabilization and growth.

Street Views

  • Phoenix Kalen, Societe Generale London Branch (Bullish on Turkish government bonds):

    "With inflation nearing its peak and likely to reach its inflection point over the next several months, we have a bullish view on Turkish government bonds across the curve, over both the short and medium terms."