Türkiye’s domestic sovereign bonds are set to be one of the top trades in emerging market (EM) fixed income next year, according to analysts at Deutsche Bank in an outlook note shared to media Monday.
Despite a sharp recent repricing offering much better entry levels into Turkish government bonds, it was still a bit too early to re-enter the market in general. However, some shorter-dated issues were already becoming attractive, Deutsche Bank strategist Christian Wietoska said in a note to clients.
"For now, we maintain a wait-and-see approach and stay underweight," said Wietoska.
"However, we do expect Turkish fixed income to become one of the best-performing EM local markets next year – after another 200-350 bps sell-off," Wietoska said in the note dated Nov. 7 and sent to media on Monday.
In Deutsche Bank’s report, it was emphasized that the Central Bank of the Republic of Türkiye’s (CBRT) decisions on monetary tightening beyond expectations, the implementation of new measures in the macro-prudential framework with a focus on protected Turkish Lira deposits, and the bank’s transparent communication contain a positive surprise for the currency.
By reversing its monetary policy, the central bank lifted its key policy rate by a combined 2,650 basis points over the last five months, with the previous hike of 500 basis points in October.
In another positive development, Türkiye’s current account recorded a larger-than-expected surplus in September at nearly $1.9 billion (TL 54.3 billion), the central bank announced on Monday.
"Along with the increasing confidence in our country, we see the reflection of the improvement in external financing opportunities in the strengthening of reserves," Treasury and Finance Minister Mehmet Şimşek said in a speech last weekend.
"An improvement of $7.3 billion was achieved in the annual current account balance in the last two months. We expect this improvement to continue in line with our program predictions," he said Monday on social media platform X, formerly Twitter.
Looking at emerging market bond markets outside Türkiye, Wietoska predicted additional adjustments in Egypt early next year on the back of another potential FX devaluation.
Egypt has faced a raft of sovereign rating downgrades and a bruising economic crisis after COVID-19 ravaged its key tourism sector.
A surge in energy prices and rising borrowing costs ramped the pressure on its fragile finances, triggering a string of currency devaluations and record inflation.
"For now, we remain underweight and prefer exposure only to t-bills," said Wietoska.
Overall, Wietoska said Deutsche remained bullish on the asset class going into year-end.
Improved fundamentals, too-high pricing for neutral rates, and supportive technicals such as low supply of bonds and light positioning are offsetting fiscal challenges and sensitivity to external factors, he said.