Turkish Lira Negates Yearly Profits After Bond Collapse

The collapse in the bond market hit the EM currencies, the lira is among the outsiders

The Turkish lira declined for the fifth straight day on Friday, driven by a sharp rise in US bond yields. Lyra has lost all the gains since the beginning of the year. The cheap lira will exacerbate the double-digit inflation problem in Turkey.

The lira fell to 7.4780 per dollar and traded at 7.4450 by 11:50 am GMT, down 1.6% on the day and approaching its worst week since the peak of the currency crisis in August 2018.

It grew strongly until mid-February, outperforming emerging market peers, after last year at 7.44, but the crash in global bond markets scared investors, who ditched emerging market currencies, fearing losses could trigger sales elsewhere.

The yield on 10-year US Treasuries this month jumped at its highest level since 2016.

Investment risk metric, Turkey's five-year credit default swaps, or CDS, rose 10 basis points to 302, while volatility metrics hit mid-January levels.

If the lira's weakness continues despite ultra-loose monetary policy in the world and tight in Turkey, an import-dependent country that imports virtually all of its energy and many consumer goods could face further upward pressure on inflation, which is already 15 %.

Petr Mathis, senior strategist at Rabobank, said the sell-off carries risks but is likely temporary.

“The big central banks will fight back strongly to prevent further gains in yields, and this should stabilize the lira and other emerging market currencies,” he said, adding that he expects the lira to fall to 6.50 this year.

However, the expert said that a sudden drop in the exchange rate could undermine confidence and stop the de-dollarization process, during which the Turks sold record amounts of hard currency.

Istanbul's main stock index fell nearly 3% before offsetting half of those losses, while the yield on Turkey's 10-year bonds rose 23 basis points to 13.5%.

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