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Almost 50% more local issuance planned in 2013 compared to 2012, which will be a headwind to a bond rally. The Treasury aims to raise TRY151bn this year, which is significantly up from TRY102bn in 2012. We think that nominal bond yields are unlikely to move much lower from current levels, despite an exceptionally favourable capital flow environment. After two years of relatively low redemptions, we expect this year's heavy issuance schedule to weigh on TRY bonds.
USD1.7bn has already been raised externally in 2013 via dollar and yen denominated bonds. The amount raised is part of the TRY14bn external issuance program for this year. In 2012, Turkey raised TRY13.6bn externally, larger than the planned TRY9.5bn. Therefore taking this into account, only ~TRY7bn remains to meet the 2013 hard currency target.
Locals have reduced their exposure in the domestic government bond market, while non-resident investors have increased their involvement. Non-residents account for 23% of total holdings as of December 2012, from just 9% in 2009. Local resident holdings meanwhile have declined from 91% in 2009 to 77%. The fall herein can mainly be attributed to the banking sector, with holdings down by over 10% since 2009, currently standing at 51% of the total. In comparison, corporate investors have kept their holdings fairly steady during the period at around 20% of the total.
We expect banking sector holdings to decline further. We think local banks will further reduce some of their exposure to government bonds and increase lending to the real economy. Largely thanks to the QE induced global grab for yield, local bond yields are now at 5.5%-6.5%, whereas deposit costs in lira come in around 8.5%-9%. It therefore makes sense for banks to reduce some exposure to low yielding government bonds, and lend at much higher rates to the real economy.
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