The Central Bank of the Republic of Turkey (CBRT) has launched its biggest government debt buybacks in over a decade, helping fill a void left by foreigners, Bloomberg wrote on February 4.

Acting in line with a programme designed to manage the banking system’s liquidity, policy makers have reportedly purchased around Turkish lira (TRY) 1.9bn ($320mn) of local-currency government bonds through auctions since the start of the year. That’s equivalent to around a third of total acquisitions last year, according to data posted on the CBRT website. Benchmark bond yields have plunged some 200bp over the period, outpacing a decline among peers by a factor of four.

In December, the central bank announced that it planned to nearly double the amount of government debt on its balance sheet to 5% of total assets, which currently works out as TRY33.3bn. According to Bloomberg calculations, it would need to purchase around 17bn lira of the securities through the end of the year to reach that goal, when redemptions are taken into account.

“We think these transactions, in addition to managing liquidity, will have an effect similar to quantitative easing and will impact financial conditions,” Erkin Isik, chief economist at QNB Finansbank in Istanbul, was cited as saying.

The situation has sparked the developing world’s strongest bond rally this year, with stealth Turkish easing essentially driving appetite for bonds dumped by foreigners.

The emergence of the central bank as a buyer has loomed large in a market that foreigners have been abandoning in droves, noted the news and financial data agency. Figures for last week showed outside investors sold Turkish bonds for a fifth week running, bringing total outflows over the past year to more than $3.3bn and pushing down their share in the local-currency debt market to an all-time low of 11%.

The purchases are said to be intensifying at a time when local pension funds and primary dealers clamour to raise their holdings amid a dearth of long-dated issuance. The Turkish Treasury hasn’t sold a 10-year bond in 18 months and isn’t expected to offer one at least through April. That puts downward pressure on government borrowing costs.

“By absorbing interest risk from the market—in size like it’s doing now—the central bank is essentially giving banks more room to do other things, like extend loans,” Isik was also quoted as saying.

But after five rounds of massive monetary easing—the benchmark rate now stands at 11.25% but stood at 24% as recently as last July—combined with three months of accelerating inflation, Turkey’s real rate now stands below zero. That drives concern that the CBRT risks loosening its stance more than is wise, especially given the regular pressure applied by strongman president Recep Tayyip Erdogan for cheaper money to drive a fast economic recovery.

“Rally is… unsustainable”

“The rally is, first, unsustainable,” Lutz Roehmeyer, chief investment officer of Capitulum Asset Management in Berlin, reportedly said. “And, second, foreigners still have big doubts about the economics and politics, even fear non-convertibility of the lira or blocking of bonds in case of US sanctions.”

Intervening to defend the lira, state banks have pumped dollars into the market at moments of heightened lira volatility. S&P Global Ratings on January 31 responded by classifying Turkey’s foreign-exchange regime as a “managed float.” Last year, authorities even orchestrated a liquidity squeeze in the offshore swap market to head off foreign short-sellers.

International investors are already “out of bonds to sell,” Viktor Szabo, an investment director at Aberdeen Asset Management in London, said, according to Bloomberg.

“For foreigners, Turkish government bonds don’t look like a very attractive proposition,” he said. “The central bank’s inflation-targeting track record is appalling, and the currency is artificially kept so strong.”