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VTB Turns on Lira Bonds as Russia Gaining Favor: Turkey Credit

February 06, 2013

Turkish local currency bonds are yielding less than ruble debt for the first time in three years, prompting VTB Capital to advise switching out of lira- denominated securities to chase better returns in Russia.

The rate on Turkey’s benchmark two-year notes was 24 basis points less than similar-maturity ruble debt yesterday, erasing a 402 basis-point premium in January 2012. Turkey’s yields -- the highest among major emerging markets last year -- are now below Brazil, India and Russia.

A possible widening in Turkey’s current-account deficit in the next six months and the start of Euroclear Bank SA settlement for Russia led VTB Capital to recommend selling Turkish fixed-rate bonds, according to Maxim Oreshkin at VTB. Turkey’s two-year yield fell the most among major emerging markets in 2012 and so far this year.

“The idea is that Turkey will experience a correction after a spectacular performance last year,” Oreshkin, the Moscow-based chief economist for Russia and Turkey at VTB, said in e-mailed comments yesterday. “International investors might start taking profits on lira notes as the real yield has collapsed markedly.”

Opening Market

Euroclear Bank said it will start direct settlement of Russian ruble-denominated government debt today, opening the $100 billion so-called OFZ market to foreign investors. OFZ bonds maturing in February 2027 snapped seven days of declines, lowering the yield one basis point, or 0.01 percentage point, to 7.08 percent. The yield fell as low as 6.94 percent after the announcement.

Turkey’s “heavy” schedule of bond sales also supports the call to sell the country’s debt and buy Russian securities, Oreshkin said. This was VTB’s first recommendation on lira debt, he said.

Turkey plans to sell 37 billion liras ($21 billion) in the February to April period, up 43 percent from the previous three months according to the debt strategy published by the Treasury on Jan. 31.

Yields on two-year lira debt sank five basis points to 5.73 percent yesterday, extending this year’s drop to 40 basis points, the most among 18 emerging markets tracked by Bloomberg. That compares with 26 basis-point decline in 2013 to 5.97 percent for similar-maturity ruble debt, according to data compiled by Bloomberg.

Inflation Outlook

Inflation accelerated faster in Turkey last month than in Russia and economists forecast the rate will remain higher in the fourth quarter. Turkish consumer prices rose 7.3 percent in January, up from 6.2 percent at the end of last year. That compares with a 7.1 percent increase in Russia, from 6.6 percent in December. Analysts predict price growth in Turkey will slow to 6.3 percent in the last three months and to 5.6 percent for Russia, according to the median estimate in Bloomberg surveys.

“Inflation is more of a worry for Turkey than Russia, so I would expect Russian bonds to be favored,” Roderick Ngotho, a London-based currency strategist Royal Bank of Scotland Group Plc, said in e-mailed comments yesterday. “Russia is about to complete on Euroclear which will very likely increase foreign participation in ruble bonds.”

Foreign ownership of Russian bonds is “low” at 6.5 percent of the total for ruble debt, while Turkey’s is 23 percent, he said.

Default Risk

Five-year credit-default swaps on Turkey fell one basis point to 132 yesterday, 10 basis points below Russia, which has a higher rating at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. The contracts for Turkey cost 19 basis points more than for Russia in October. Lower prices show improving perceptions of a borrower’s creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.

The extra yield investors demand to hold Turkish debt denominated in dollars rather than U.S. Treasuries increased one basis point, or 0.01 percentage point, to 193 yesterday, according to JPMorgan’s EMBI Global Index. The yield spread for Russia was little changed at 173. The gap was 176 for Turkey and 191 for Russia at the end of November.

The lira weakened 0.3 percent to 1.7664 against the dollar at 6:10 p.m. in Istanbul yesterday, paring its 2013 gain to 1 percent. That’s less than the 1.6 percent advance for the ruble this year.

Turkey’s central bank cut both ends of its interest-rate corridor last month to prevent capital inflows pushing up the lira, while Russia left rates unchanged. It lowered the overnight lending rate to 8.75 percent and the borrowing rate to 4.75 percent.

“Turkey is holding interest rates too low for my taste,” Lutz Roehmeyer, who helps oversee about $19 billion as a fund manager at Landesbank Berlin Investment in Berlin, said in e- mailed comments yesterday. “The interest-rate differential is in favor of ruble debt and government yields of around 6 percent in the lira are not compensating for any policy error of the Turkish central bank.”

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at

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