Turkey's lira bonds ‘cheap’ after inflation eases: Deutsche Bank

LONDON: Slowing Turkish inflation has helped make the country's lira-denominated government bonds "cheap" for the first time this year, Deutsche Bank's analysts said, adding that their models pointed to potentially stellar gains ahead.

Data on Friday showed Turkey's headline inflation rate unexpectedly slowed to 19.5 percent last month, while core-inflation surprised even more to the downside, coming in at 16.3 percent compared to 17.5 percent in March.

With the figures potentially easing the pressure on the central bank to again raise interest rates sharply, the valuation metrics of the country's heavily sold-off bonds have shifted.

"We note that it is now the first time this year, that 10- year local (currency) bonds are in fact cheap in our bond valuation model," Deutsche's emerging markets strategist Christian Wietoska said in a note.

The model's 'fair value' for government bond yields was now 19.10 percent versus their current market levels of 19.50 percent.

"With our year-end forecast for 10-year bonds of 16.0 percent, we now see 7.2 percent excess return by year-end (25.7 percent return in local currency vs 18.5 percent FX implied yield return by year-end)."

"This is the highest expected return for a 9-month time period across all EM we have seen in our models in more than twelve months," Wietoska said.

However, the note added that fiscal and economic developments, recapitalisations in the country's banking sector and changes in portfolio and dollar FX deposit flows were all key things to watch.

"Without improvements on sentiment, it will be difficult to see the reversal of portfolio flows despite now arguably cheap valuation in local assets," Wietoska said.