Turkey’s Bonds Look Overpriced for Morgan Stanley After Rally

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Turkey’s dollar bonds are now looking too costly after leading a rally in high-yield emerging markets in recent weeks, according to Morgan Stanley strategists.

“In both absolute and relative terms, Turkey looks expensive,” said Neville Mandimika, a London-based emerging market sovereign strategist at Morgan Stanley, in a note to clients. “Given the uncertain policy path, we retain our dislike stance as risk/reward is clearly not favorable.”

Morgan Stanley said 10-year yields now trade at a six-month z-score at nearly two standard deviations below the mean, which is near multi-year lows and compares unfavorably with similarly-rated peers. Meanwhile there are risks from monetary policy, next year’s elections and the potential for more bond sales.

Turkey’s dollar-denominated bonds are on a tear, rising for a fourth day on Wednesday to take 10-year yields down four basis points to 9.8%, the lowest level since mid-September. That followed the sale of $1.5 billion in bonds due 2028 on Monday, though the country is still $2 billion short of its borrowing target for the year.

Turkey Prices New Dollar Bond as It Leads EM Debt Rally

Mandimika said more issuance remains a major risk.

“Historically, Turkey has issued when the market has been trading relatively well: low volatility and at times when EMBI spreads have been compressing. They could still come to the market for another $2 billion if market conditions hold up,” he said.

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