U.S. Markets closed

Central Bank Salvation for the Turkey ETF


The embattled iShares MSCI Turkey ETF (TUR) may have gotten a lifeline Tuesday evening when the Turkish central bank raised its overnight lending rate to 12% from 7.75% and more than doubled the overnight borrowing rate to 8% to 3.5% in one of the boldest moves by any central bank in recent memory to defend a flailing currency.

As the chart below indicates, forex traders cheered the move, sending the Turkish lira soaring against the U.S. dollar.

Chart Courtesy: Investing.com

Although TUR rose modestly Tuesday and closed in the higher end of its intraday range, volume was light. TUR, which posted an almost 66% gain in 2012, plunged 27.3% last year amid overall distaste for emerging markets ETFs, political violence and a faltering lira in Turkey. [Turkey ETF Battered by Violence]

Viewed by some analysts as one of the emerging markets most vulnerable to the Federal Reserve’s plans to reduce its bond-buying program, Turkey has been able to obfuscate high political risk from foreign investors.  TUR’s nearly 11% year-to-date loss ranks among the 10 worst performances by non-leveraged ETFs. [Big Trouble in Emerging Markets]

With Turkish citizens eager to dump lira in favor of dollars, euros and other foreign currencies, yields on the country’s 10-year sovereign bonds spiked to almost 10.5%, according to CNBC.

As those yields have soared, ETFs with significant allocations to Turkish debt have been hampered. That list includes the iShares Emerging Markets High Yield Bond ETF (EMHY) , which had an almost 14% weight to Turkey as of Jan. 27, and the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) .

EMLC had a 7.3% weight to lira-denominated debt as of the end of 2013. Turkey is also a top-five country weight in the Vanguard Emerging Markets Government Bond ETF (VWOB) . [Problems for This EM Bond ETF]

iShares MSCI Turkey ETF