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Turkey’s Lira: A Popular Trade Amid High Interest Rates
In recent months, hedge funds and other traders have invested billions of dollars in the Turkish lira, seeking juicy returns. However, this influx of "fast money" has also left the country more vulnerable to sudden swings in sentiment, say investors and analysts.
The Rush of "Fast Money"
Money managers have poured around $24 billion into trades that seek to profit from Turkey’s high interest rates, currently at 50%. This has led to a significant increase in foreign inflows, with investors such as hedge funds and emerging market sovereign and foreign exchange funds taking advantage of the high yields.
Turkey’s Economic Overhaul
Turkey’s pivot towards conventional economic policies, which began last summer, has helped draw back international fund managers who had fled the market in recent years due to unorthodox measures fueling runaway inflation. The country’s central bank has raised its main interest rate to 50% from 8.5% since last June as part of a broad economic overhaul.
Moody’s Upgrade
Moody’s Investors Service recently awarded Turkey a rare two-notch upgrade to its junk-level credit rating to B1, citing the "increasingly well-established return to orthodox monetary policy".
The Lira’s Performance
The lira has generated total returns, including gains from interest payments, of 18% against the US dollar in 2024, despite a significant depreciation in the Turkish currency. Few other emerging market currencies have offered such strong total returns.
Foreign Investors’ Appetite
Foreign investors have scooped up around $12.5 billion in lira-denominated government bonds since the economic volte-face last June. Foreign investors now hold 6.7% of the country’s domestic debt stock, compared with 0.6% before May’s election.
Central Bank’s Foreign Exchange Reserves
The international inflows have been a major boon for the central bank’s effort to rebuild its foreign currency war chest, which was severely depleted in recent years. Net foreign assets, a proxy for foreign exchange reserves, have jumped to $40 billion from around minus $20 billion last summer.
Conclusion
Turkey’s lira has become a popular trade among investors seeking high yields, but the influx of "fast money" has also left the country more vulnerable to sudden swings in sentiment. The country’s economic overhaul and commitment to keeping monetary policy tight have helped rebuild its foreign currency war chest and attract foreign investors. However, many conservative investors remain too nervous to make large allocations to Turkey, citing concerns about policy changes.
FAQs
Q: What is the current interest rate in Turkey?
A: The current interest rate in Turkey is 50%.
Q: What is the total return of the lira against the US dollar in 2024?
A: The total return of the lira against the US dollar in 2024 is 18%.
Q: What is the current foreign investor holding in Turkey’s domestic debt stock?
A: Foreign investors currently hold 6.7% of Turkey’s domestic debt stock.
Q: What is the central bank’s foreign exchange reserve level?
A: The central bank’s foreign exchange reserve level is $40 billion.
Q: Why are many conservative investors too nervous to invest in Turkey?
A: Many conservative investors are too nervous to invest in Turkey due to concerns about policy changes and the country’s economic stability.
Author: www.ft.com
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