Analysts at Deutsche Bank have forecasted a significant turnaround for Turkish lira bonds, suggesting they could transition from the worst-performing local debt market in emerging nations this year to the best performer in 2024. The bank expects these bonds to see a repricing by an additional 200-400 basis points before they can be considered structurally valuable.
This optimistic outlook is shared by JP Morgan and other prominent investors who are wagering on a recovery for this asset class, which has suffered considerable outflows due to political instability and government interference in monetary policy. Last month, in a move welcomed by the market, Turkey's central bank increased interest rates to 35% for the fifth time in a row and eased regulations.
Despite these positive steps, Deutsche Bank anticipates further weakness in Turkish bonds until the end of this year. This forecast is driven by persistent inflationary pressures, high volumes of bond issuance, and expectations of continued monetary tightening. The analysts recommend purchasing the Turkish lira against the U.S. dollar until yields on two-year notes reach 40% and those on ten-year notes hit 35%.
The central bank has also adjusted its year-end interest rate projection upward to 65%, a notable increase from its prior estimate of 58%. Inflation is expected to peak above 70%, which will likely lead to a gradual depreciation path for the Turkish lira exchange rate.
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