In terms of surrealism in global finance, Turkey must have a fair claim to the lead with the OFFICIAL (yes please, note the upper case letters) inflation data from the country’s TUIK statistical institute currently indicating tempting real returns on Turkish lira (TRY) bonds and the central bank (even quicker nowadays to answer the direct-line phone when the monetary masterminds in the Erdogan administration choose to make a call) almost certainly set to cut its policy rate further across the remainder of the year in the dash for another dose of short-term growth that distracts from the longer-term reckoning.

Following the central bank’s inflation outlook release, July 31 saw a Bloomberg story headlined “Lira Bonds May Soar Higher If Turkey Proves Right on Inflation”.

If the pre-condition for higher bond returns is Turkey’s ability to prove right on inflation, it’s in the pocket. Tax hikes may be in town and price hikes may be seen on every street corner, but, don’t you worry, by hook or by crook the TUIK will come up with the goods.

However, it falls to the doomsters and gloomsters to remind the reader that the bond returns will, unfortunately, depend more on the ability of the government to keep the lira under control.

The government’s lira bonds returned investors 11% in dollar terms in July, despite strongman Recep Tayyip Erdogan controversially firing central bank Murat Cetinkaya at the beginning of the month by presidential decree and replacing him with one of his deputies, Murat Uysal. The new fella was quick to stress just how wonderfully independent in monetary policy he would be from Erdogan and it was enough to bring tears to one’s eyes to see how the press corps dutifully scribbed that down.

The story of Erdogan firing the central bank boss after he put up resistance to ‘Erdoganomic’ easing made for a gory ‘Game of Thrones’ episode in Ankara, while the next episode, featuring the immunity of the local currency from strife in the same month of that firing proved excellent exercise for the eyebrows. At least, back in the normal world surely they’d call that sequence of events suspicious.

In second place for returns on emerging market local debt in July was Israel. Okay, it only came up with 3.9%, but it still goes down as another ‘Populistan’ defying the doubters (By Jove, Boris, by Jove!) at a time when there is $14tn worth of negative yielding debt, according to data compiled by Bloomberg.

Also on July 31, the Fed brought in a 25bp rate cut and ended its balance sheet reduction two months earlier than planned. US President Donald Trump (who must have been climbing the walls in frustration when comparing his measly 25 with his pal Erdogan’s whopping 425, the highest seen in Turkey in 17 years) had been baring his fangs at Fed chair Jerome Powell for months prior to the loosening, urging him to throw some monetary caution to the wind. Powell, who regularly claims he’s entirely Trump-tweet-resistant, won’t be having it if you suggest he caved, although his institution failed to provide any solid economic explanation for why it had gone for its “mid-cycle adjustment”. There again, at least it said it did not observe any type of marked economic weakness that would necessitate a longer rate-cutting cycle. Cue, populist snorts of derision at 1600 Pennsylvania Avenue and sales of emerging market currencies that even gave the lira a wobble.

Even Turkish analysts in the mainstream media are on the point of pulling out a clump of hair or two as they puzzle over how it is not possible to explain the recent movement of the lira on a purely technical basis.

Some of those who’ve freed themselves for a brief sojourn on social media have even plunged into Greek mythology to explain Ankara’s policy making.

But, relax, you are not alone: let it be known that it is not possible to explain these matters in the post-truth world. To a populist, plain logic is about as welcome as a dog in a game of skittles.

Of course, the populist takeover of all minds is not yet complete, so let’s have a quick dalliance with plain logic nevertheless—Turkey’s inflation is falling thanks to falling and even crushed demand in a recession-wracked economy, the country’s exports are booming thanks to the severe currency depreciation, its economy is rebalancing—quite painfully for the unlucky many—thanks to the squeezed current account deficit, the USD/TRY rate fell in anticipation of the Fed easing, and so forth...

Meanwhile, Icarus, who dared fly too near to the sun on wings of feather and wax and plunged to his death in the sea, and Pygmalion, who fell in love with the ivory statue of womanhood he carved, are becoming rather popular with Turks who are in a hurry on social networks to keep close track of how much the dollar is set to sell for on the road ahead.

They’re damn well not going to believe anything this Turkish government might say to inject confidence, and they’re buying up dollars whatever the Fed does and does not. Do they spend much time pondering over how real returns are calculated using lira interest rates or crunching the USD/TRY rate or the official inflation figures? None at all. Do they feel a change of heart coming on after digesting headlines such as “FX deposits in Turkey fall following Istanbul revote”? Do they hell.

Well, the Turks are just not interested by now, but Bloomberg is out of the blocks again, calculating Turkey’s real base rate at 4% following the 425 bp cut, while Turkey’s market community has been trying to identify what “a reasonable rate of real return” means and which methodology the central bank will use to calculate the real return.

Meanwhile, the identity of the central bank governor may have changed but the regulator’s style of communication remains intact. New governor Uysal took three questions from three people during one round at the only press call the central bank governor holds after the quarterly inflation outlook release—and successfully avoided answering the persistent questions on the real yield.

Of course, the real story amid this monetary melange is that the Erdogan moustache grown by Uysal since he was appointed central bank governor has brightened his career prospects.

Uysal also made a point of saying that the monetary policy committee “independently” cut the benchmark rate at its last meeting.

Curiously, on the eve of Uysal’s press briefing, finance minister and Erdogan son-in-law Berat Albayrak told financial media in a closed-door meeting that the rate cut would probably be followed by reduced loan rates, especially from state-run lenders.

The day after Albayrak’s meeting with journalists, the finance ministry said in a July 31 statement that the comments from the minister on falling interest rates referred to the overall trend in Turkey, and did not directly refer to central bank policy.

Attempts to define the Turkish economy as a “remote economy” are apparently in circulation. The convertibility of the Turkish lira is also being questioned.

Albayrak also said Turkey will likely run a budget deficit of below 3% of GDP this year, with an increase in revenue coming in the second half of the year. Even though the government did not feel the need to make an official announcement, the Treasury last week received the first tranche of additional transfers from the legal reserves of the central bank. It has already spent the windfall on payments, according to local media reports. Nothing to see here, says Albayrak. All quite standard stuff.

Patently, Albayrak should have referred to the transfers from the central bank in relation to the H1 revenue increase, given the collapse in tax collection.

Albayrak also reportedly said $10bn had arrived in Turkey since May. The portfolio inflows the finance minister spoke of are not visible in the balance of payments, but why kick up a fuss in a Turkey where the central bank reserves are not even questioned anymore.

Those who trusted in Turkey earned 20-60% across last year, while those who succumbed to negativism lost 10-15%, Albayrak—who says he taught banking and finance at Marmara University, the same institution at which Erdogan graduated one year before the relevant faculty was established—also reportedly said.

The strategy of pushing Turkish residents sitting on FX into losses in order to make them shift their savings into lira would perhaps prove more successful if Turkey’s finance minister gave up talking about financial matters or the Erdogan press stopped publishing financial stories.

Albayrak, who remains under intraparty pressure despite providing everyone with pretty pinkish official macro figures, also purportedly told financial media representatives that they should put the question of whether there is to be a cabinet reshuffle to his father-in-law.

The 'real rate'
After transferring inflation targeting to the TUIK, the central bank is presently targeting “a reasonable rate of real return” to attract some portfolio inflows.

It is also obviously pressing as hard as possible on the USD/TRY rate to persuade Turks to sell their dollars.

“The reasonable rate” seems like the latest contribution to local central banking terminology by the central bank’s non-central banker governors. However, international observers are more comfortable in calculating real returns as they do not have to spend time with “interest rate corridors”, they use the main policy rate in their analysis.

To determine the level it deems “reasonable,” the Turkish central bank assesses variables that include the portfolio preferences of domestic investors and real rates in peer countries such as South Korea, Brazil and South Africa, according to Uysal.

“The reasonable real rate for us corresponds to a monetary stance that’s mindful of the economy’s internal and external balances and also maintains a continuation of an inflationary decline. This concept must also consider the balancing in financial flows,” he said.

The Turkish government has systematically spooked private lenders by imposing lower rates via public lenders in domestic debt auctions since last November, while it “requested” that the banks buy more government debt earlier this year after its eurobond channel was temporarily inaccessible.

Last month, the government managed to raise $2.25bn from a eurobond sale and it is currently aiming to benefit from the Fed easing by securing portfolio inflows.

Under these conditions in Turkey’s singular environment, it becomes a matter of bravery for sole traders, or a matter of inside information for investment funds, that want to enjoy the high real returns on lira government bonds.

Average real yields on Turkish bonds have now turned negative, according to data compiled by Bloomberg. That suggests that some “people with knowledge of the matter” have already written up their profits.

“But [Turkish government bonds] still [yield] 15.5% in nominal terms, which is enough to entice significant inflows, especially with the world’s major central banks being dovish. A falling inflation rate would serve to make the trade that much more attractive,” the Bloomberg story added.

Portfolio inflows are always welcomed by Ankara, but it was as recently as the end of March when foreign investors were ‘kidnapped’ by Turkish officials who shut down offshore lira liquidity on the London swap market.

According to latest data out of the finance ministry, non-residents’ share in the government’s domestic debt stock stood at 10.8%, or TRY79.4bn, as of June. The share of foreigners has gradually declined, moving down from 19% in April 2018 to 10% in May this year.

As of July 19, portfolio outflows from Turkey’s domestic government bonds amounted to $2.47bn so far this year, according latest central bank figures. That came on top of the $906mn of outflows seen in 2018.

Domestic Government Debt Auctions and Borrowing Program
(TRY bn)			Total		Public		Yield
Auction	Maturity	Paper	Bids	Sold	B	S	(%)
19-Mar	12/11/2019	266-day Zero Coupon (re-open)	3.9	2.8	0.6	0.6	19.97
19-Mar	01/10/2024	5-year CPI-indexed semi-annual (re-open)	3.2	2.6	0.5	0.5	3.89
26-Mar	08/12/2020	2-year fixed semi-annual (benchmark) (re-open)	3.8	3.3	1.8	1.8	19.39
26-Mar	08/06/2025	6-year floating semi-annual (re-open, 6.)	1.7	1.5	0.5	0.5	19.78
22-Apr	04/21/2021	2-year fixed semi-annual (benchmark) (new)	4.6	3.2	1.0	1.0	22.18
13-May	05/13/2020	364-day Zero Coupon (new)	10.1	7.2	1.3	1.3	26.12
13-May	01/10/2024	5-year CPI-indexed semi-annual (re-open)	4.6	3.5	0.7	0.7	4.25
14-May	04/21/2021	2-year fixed semi-annual (benchmark) (re-open, 2.)	5.7	4.5	1.3	1.3	25.31
14-May	08/06/2025	6-year floating semi-annual (re-open, 6.)	3.9	3.1	0.5	0.5	21.38
10-Jun	05/13/2020	336-day Zero Coupon (new)	6.9	5.3	1.1	1.1	24.45
10-Jun	06/05/2024	5-year CPI-indexed Semi-annual Coupon (new)	2.8	2.2	0.4	0.4	4.15
11-Jun	04/21/2021	2-year Fixed Semi-annual (benchmark) (re-open)	4.4	3.5	1.1	1.1	22.83
11-Jun	08/06/2025	6-year floating semi-annual (re-open)	2.6	2.1	0.4	0.4	20.89
18-Jun	06/16/2021	2-year lease certificate (direct sale)		1.6
18-Jun	12/11/2019	6-month lease c. (to pension funds, unscheduled)	3.9	2.1	-	-	23.49
June	Borrowing	Total Realization	20.5	16.7	3.0	3.0	-
8-Jul	09/16/2020	434-day Zero Coupon (new issue)	12.7	9.7	0.8	0.8	20.6
8-Jul	06/05/2024	5-year CPI-indexed semi-annual (re-open)	3.3	2.6	0.4	0.4	4.17
9-Jul	10/09/2019	3-month bill (new issue)	3.7	2.1	0.1	0.1	22.25
9-Jul	04/21/2021	2-year Fixed Semi-annual (benchmark) (re-open)	7.7	6.1	1.8	1.8	19.35
9-Jul	08/06/2025	6-year floating semi-annual (re-open)	4.2	2.9	0.8	0.8	20.3
July	Borrowing	Total Realization	31.7	23.3	3.9	3.9	-
19-Aug	09/16/2020	392-day Zero Coupon (re-open)
19-Aug	08/06/2025	6-year floating semi-annual (re-open)
20-Aug	08/10/2021	2-year lease certificate (direct sale)
20-Aug	06/05/2024	5-year CPI-indexed semi-annual (re-open)
10-Sep	08/18/2021	2-year Fixed Semi-annual (benchmark) (re-open)
10-Sep	06/05/2024	5-year CPI-indexed semi-annual (re-open)
17-Sep	10/07/2020	385-day Zero Coupon (new)
17-Sep	08/06/2025	6-year floating semi-annual (re-open)
8-Oct	01/08/2020	3-month bill (new issue)
21-Oct	10/20/2021	2-year Fixed Semi-annual (benchmark) (new issue)
22-Oct	10/07/2020	350-day Zero Coupon (re-open)
22-Oct	06/05/2024	5-year CPI-indexed semi-annual (re-open)