Japanese individuals cut their purchases of Turkish bonds this year, driven away by the protests that rocked the nation last month.
The amount of uridashi bonds sold in liras as a proportion of total sales fell to 3.7 percent this year from 8.5 percent in 2012, dropping its ranking to No. 4, according to data compiled by Bloomberg. Mexico displaced Turkey, rising to second place from eighth. Two-year lira yields are the highest among major emerging markets after Brazil.
The biggest anti-government protests in a decade last month left six people dead and hundreds injured, helping send two-year yields up 435 basis points from a record low on May 17. Foreign investors sold $1.7 billion of Turkish bonds since Federal Reserve Chairman Ben S. Bernanke said on June 19 the U.S. central bank may reduce its monthly asset purchases.
“The authoritarian crackdown of political protests is very unattractive,” Michael Shaoul, chairman of Marketfield Asset Management LLC, said by e-mail from Tokyo yesterday. “Foreign hot money now wants to go elsewhere.”
Sales of so-called uridashi bonds, issued in Japan and denominated in lira, totaled $1 billion in 2013. This compares with $3.52 billion for all of last year, when lira-denominated uridashi debt replaced Brazil as the most popular foreign-currency bond after the Australian dollar, data compiled by Bloomberg show.
Trades involving borrowing in low-cost nations to invest in economies with higher interest rates have been popular among investors in Japan, sometimes referred to as “Mrs. Watanabe,” a reference to housewife investors who control family budgets. After Mexico, the U.S. and Australia precede Turkey as the most popular foreign destinations for Japanese investors this year.
Carry trades in Turkish lira returned 8.4 percent this year in yen terms, ranking 17th among 23 emerging markets, according to data compiled by Bloomberg. Investors who borrowed in yen and invested in Mexican local debt gained 16.2 percent in the period.
“There is a lot of news of instability in developing countries after money-flow changes prompted by future Fed tapering,” Toru Suehiro, a market economist at Mizuho Securities Co. in Tokyo, said by e-mail yesterday. “Regarding lira bonds, Japanese investors are avoiding them because of the riots. Regarding the Mexican peso, on the other hand, Mexico is expected to shine from the effects of the U.S.’s improving economic condition as their economies are strongly related.”
Protests against Erdogan’s government started on May 31 after police tear-gassed opponents of plans to re-develop Gezi Park near Taksim Square in Istanbul. Unrest spread across the country in June as demonstrators accused the government of adopting an increasingly autocratic style.
The lira gained 0.1 percent to 1.9262 against the dollar at 1:48 p.m. in Istanbul today, trimming declines in the past two months to 2.6 percent, the biggest drop after Russia’s ruble among emerging-market currencies in Europe, the Middle East and Africa.
The central bank has sold $6.75 billion to shore up the currency, which slid to a record-low 1.9740 per dollar on July 8, and raised the overnight lending rate by 75 basis points a week ago in the first rate increase since October 2011.
Yields on two-year lira debt fell nine basis points, or 0.09 percentage point, to 9.14 percent today. The yield on 10-year bonds declined eight basis points 9.35 percent. That compares with a rate of 0.8 percent on similar-maturity yen debt.
The “Mexican peso has a clear positive story which is the strength in U.S. economy,” Junya Tanase, a currency strategist in Tokyo at JPMorgan Chase & Co., said by e-mail yesterday. Still, the lira remains relatively popular and offers “relatively high yields and sound macro conditions,” he said.
Mexico sends about 80 percent of its exports to the U.S.
Portfolio outflows from Turkish bonds and equities totaled $934 million in the week to July 19, according to central bank data released July 25. Bond outflows reached $3.4 billion and those from equities totaled $1.54 billion since May 31, the data show.
Turkey’s credit-default swaps, contracts insuring the nation’s debt against non-payment, rose nine basis points to 211 today, after the biggest weekly increase in a month, data compiled by Bloomberg show.
Emerging-market investments are “mainly a currency play to Japanese investors who have suffered from extremely low interest rates over many years,” according to Kazuto Doi, a portfolio manager in Tokyo at Western Asset Management Co., which oversees about $460 billion.
“People were excited when Turkey became investment grade but soon after there were political instabilities,” Doi said in e-mailed comments yesterday. “People can see an easier story in Mexico to buy.”
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