Turkey Asks Banks to Buy Dollar Bonds as Market Pressure Mounts

·2 min read

(Bloomberg) -- Turkey’s central bank asked some local lenders this week to step in and buy the country’s dollar bonds, the latest effort to provide a backstop to private markets as pressure builds before a presidential runoff election on Sunday.

Most Read from Bloomberg

Officials called some of the country’s banks on Monday and asked them to buy dollar bonds across multiple maturities in secondary markets, according to people familiar with the matter, who asked not to be named because they aren’t authorized to speak publicly. The central bank declined to comment.

The request, the people said, was aimed at keeping borrowing costs stable and also to fend off a spike in credit-default swaps — a measure of protection against potential credit events, such as default. The lenders were not given purchase targets, they said.

Authorities have intensified their interventions in markets to provide some stability ahead of the elections, the first round of which was held on May 14 and was inconclusive, with no candidate receiving the necessary 50% of the vote to win. The strategy has been costly, drawing down Turkey’s reserves and pushing foreign investors out of the market.

The latest move appears to have been successful, for now. Turkey’s five-year credit default swaps dropped to 663 basis points after surging to above 700 this week from 480 in the week before the vote. Dollar bonds across varying maturities also rallied, with the yield on the 2047 note, the country’s longest-maturity debt, dropping back below 10%. It had spiked from 8.18% just before the first-round vote.

Read more: Turkey’s Erdogan Wins Support of Eliminated Rival in Runoff

In the currency markets, the lira has continued to weaken. It traded 0.2% lower at 11:20 a.m. in Istanbul on Thursday, falling to 19.9270, its weakest level ever on a closing basis. The lira has lost 6.1% of its value this year, and 34% since the beginning of 2022.

Read more: Bets Against Turkish Lira Hit Record With Controls Under Strain

President Recep Tayyip Erdogan’s surprisingly strong showing in the first round vote — he won 49.5% — led to a selloff in Turkish assets as investors weighed the possibility of his unconventional economic policies continuing. Erdogan faces the opposition candidate Kemal Kilicdaroglu, who won 44.9% of the vote in the first round, on Sunday.

Turkey’s central bank will meet for a regularly scheduled interest-rate decision later on Thursday. All 21 participants in a Bloomberg survey expect the bank to hold its benchmark interest rate at 8.5%, the world’s most deeply negative real rate when compared to inflation, which last clocked in at 44% in April.

--With assistance from Srinivasan Sivabalan.

(Updates prices, adds details throughout.)

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.