(Bloomberg) -- Abrdn Investments’ Kieran Curtis was one of the first foreign investors to spot an opportunity in a little-known type of Turkish floating-rate bonds when the country’s interest rates were surging to all-time highs.
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Now he says he favors conventional fixed-rate lira debt with short maturities, and bought the notes for the first time in more than three years in December before the central bank began cutting rates. The bet is already paying off, with the yield on two-year notes dropping to below 40% on Monday from around 43% before the central bank’s rate cut, while five-year notes retreated to 32% from around 35%.
“I thought that the cuts would start December or January and the two- and five-year part of the curve was good value,” said Curtis, who’s director of investment at Abrdn in London.
Curtis says he’s still holding onto the niche floating-rate debt, known as TLREF notes, but he’s not buying any more of it. The TLREF notes are indexed to Turkey’s overnight reference rate set by the central bank, and became increasingly popular among foreign fund managers searching for extraordinary yields in emerging markets.
The picture started to change when the central bank reduced its one-week repo rate by more than markets expected in December — to 47.5% from 50% — after keeping it on hold for eight meetings. The central bank’s easing cycle preceded the release of data that showed inflation fell to 44% in December; the target is 21% by the end of this year.
“I still think there is some uncertainty about how much inflation comes down,” Curtis said. “My base case is still that it will be hard to get below 30% this year, but service prices have been going in the right direction recently so I’m open to changing my mind.”
Investors will be counting on the central bank to carry out its rate cuts without destabilizing the lira, Curtis added. Policymakers have so far indicated that preventing steep currency losses would remain a cornerstone of their strategy for reducing inflation into 2025.
“We need the central bank to be measured or it won’t work,” Curtis said. “Too much pressure on the lira if rate cuts are too quick.”
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