The cost to borrow Turkish liras overnight more than doubled on Wednesday after soaring to an 18-year peak the previous day in a sign of how money markets have seized up after an apparent bid to stymie foreign short sellers.
The overnight swap rate, the cost to investors of exchanging foreign currency for lira over a set period, soared to 700 per cent, after hitting 325 per cent, the highest level since 2001, in the previous session.
The rising cost highlights what some analysts say is an attempt by Turkey’s government to arrest a decline in the lira, after the currency on Friday faced its heaviest plunge since the economic crisis during the summer of 2018. It rose both on Monday and Tuesday this week, but pulled back by more than 1 per cent as London dealings got under way on Wednesday.
A London-based analyst, who asked not to be named, said on Tuesday that Turkish banks were telling him they had been ordered “not to lend even a single lira to foreign counterparties”.
Turkey’s fixed-income market also showed signs of rising investor angst. A dollar-denominated sovereign bond maturing in October 2028 was trading with a yield of 7.54 per cent on Wednesday, from roughly 7 per cent early last week.
Local currency paper has also suffered price declines, knocking yields higher. The benchmark 10-year yield was 17.2 per cent on Wednesday, having gone to as low as 13.8 per cent at the end of January.
Esther Law, a senior investment manager for emerging market debt at the asset manager Amundi, said that the measures to curb short selling were “tactically supportive” for the lira but warned: “It’s not solving the problems and it’s definitely not helping the local bond market.”
Another emerging markets investor added that, by apparently “killing the offshore swap market, foreigners cannot easily hedge their lira bond positions.”
“That is shooting them in the foot again,” he said.
The launch of an investigation by Turkish authorities over the weekend in JPMorgan, after the investment bank published a bearish report on the lira, has also prompted a chill in the flow of research, according to investors, creating a headache for some managers who use the reports.
The recent bout of market volatility comes days before crucial local elections, scheduled for Sunday. Turkish President Recep Tayyip Erdogan runs the risk of losing control of Ankara, the country’s capital, and Istanbul, its largest city.
Sharp swings in the currency have added another economic worry for Turks, who are facing red-hot inflation and a sharp economic slowdown.