Market News
Best EM Carry Trade Boosted by Turkey’s Inflation-Proofed Lira - BLOOMBERG
(Bloomberg) -- The Turkish central bank’s strategy for managing the lira is laying the ground for traders to enjoy even more of the world’s most profitable carry trade.
Turkey’s economic administration has been pursuing a policy of “real appreciation,” meaning that the lira weakens but by less than the rate of inflation. The aim is to minimize price pressures stemming from a weakening currency.
While the lira lost 16% against the dollar in nominal terms last year, by the adjusted measure it posted its biggest gain since 2007, a boon for foreign investors who could earn interest of more than 50% on lira bonds.
In its monetary policy report for 2025, the central bank said that lira-denominated assets would remain attractive to investors, indicating that inflation-adjusted appreciation is likely to remain a cornerstone of its disinflation policies. That’s good news for anyone investing in Turkish assets.
“In terms of carry, it is a very well-paying strategy,” said Peter Kinsella, head of foreign-currency strategy at Union Bancaire Privee Ubp SA in London, who says he’s been bullish on lira carry trades for the past six months. “The only question is to what extent and how quickly will the Turkish central bank cut rates? That’s the issue.”
The carry trade involves borrowing in places and currencies where interest rates are relatively low, like the US, Europe and Japan, and investing those borrowed funds in places where rates are higher, such as Turkey. By ensuring a smooth and largely predictable exchange rate, the Turkish central bank has made the strategy significantly more attractive because it reduces the risk of sudden currency losses.
Over the past six months, investors who borrowed in dollars and invested in lira carry trades earned an average return of 15%, according to data compiled by Bloomberg. That’s nearly double the return on investments in Argentine pesos, the next closest contender.
Goldman Sachs Group Inc. economists Kevin Daly and Clemens Grafe said this month that the central bank is unlikely to allow any acceleration in lira depreciation in the near term, even after it started cutting interest rates in December. With lower rates making domestic assets slightly less attractive, currency stability becomes even more crucial, they said.
“For now the lira carry trade remains attractive, but we will have to see how fast will the central bank cut rates,” said Viktor Szabo, senior investment manager at Abrdn Investments Limited in London. While Turkey’s latest inflation and economic activity data were supportive of an aggressive easing cycle, “a gradual cycle makes more sense,” he said.
Many analysts have penciled in a series of larger rate cuts in all of the central bank’s eight meetings in 2025. Turkey’s annual inflation rate slowed to 44.4% in December from 47.1% in November.
Selva Bahar Baziki, Bloomberg’s Turkey economist, said one unwanted consequence of real appreciation in the lira could be higher demand for imported goods, a risk to the current-account balance.
“Without substantial inflows to sustain the lira’s gains, that’s a hard equilibrium for policymakers to maintain,” she said.
“So far, we are not seeing any indication that investors need to be concerned about this dynamic, although we would caution that positioning is already quite over-crowded, and it’s likely that many potential investors are already invested in the lira,” said Daniel Wood, a portfolio manager at William Blair Investment Management in London. “Although we are seeing that valuations are a little more stretched than in 2024, we believe that this is offset by fundamentals which have also improved.”
--With assistance from Beril Akman and Patrick Sykes.
