The Turkish central bank has kicked off its biggest government debt buybacks in over a decade, helping fill a void left by foreigners and adding momentum to the developing world’s strongest bond rally this year, according to Bloomberg.
As part of a program designed to manage the banking system’s liquidity, policy makers have purchased about 1.9 billion lira ($318 million) of local-currency government bonds through auctions since the beginning of January, equivalent to around a third of total acquisitions last year, according to data on the central bank’s website.
In December the central bank announced plans to almost double the amount of government debt on its balance sheet to 5 percent of total assets, which currently works out to 33.3 billion lira. According to Bloomberg calculations, it would need to purchase around 17 billion lira of the securities through the end of the year to reach that goal, when redemptions are taken into account.
The emergence of the central bank as a buyer has loomed large in a market that foreigners have been abandoning in droves. Data last week showed outside investors sold Turkish bonds for a fifth week running, bringing total outflows over the past year to more than $3.3 billion and driving their share in the local-currency debt market to an all-time low of 11 percent.
The purchases are intensifying at a time when local pension funds and primary dealers clamor to increase their holdings amid a dearth of long-dated issuance. The Turkish Treasury has not sold a 10-year bond in 18 months and is not slated to offer one at least through April, putting downward pressure on government borrowing costs.
But after five rounds of massive monetary easing, combined with three months of accelerating inflation, Turkey’s real rate now stands below zero, raising concern that the central bank risks loosening its stance more than warranted. President Recep Tayyip Erdoğan has repeatedly said that policy rates will fall into single digits this year.
In an effort to prop up the lira, state banks have flooded the market with dollars at moments of heightened volatility in the currency, a move that prompted S&P Global Ratings to classify Turkey’s foreign-exchange regime on Friday as a “managed float.” Last year, authorities engineered a liquidity squeeze in the offshore swap market to stand in the way of foreign short-sellers.