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German lender Deutsche Bank upgraded Turkish lira-denominated government bonds to "strong overweight" from "modest overweight," citing growing rate-cut expectations, easing inflation and attractive valuations.
In a note released on Friday, it described Turkish lira bonds as one of the most attractive fixed-income opportunities across Central and Eastern Europe, the Middle East and Africa (CEEMEA).
Expectations that the Central Bank of the Republic of Türkiye (CBRT) will begin easing monetary policy as growth slows and inflation cools underpin the recommendation, while the country's relatively low sensitivity to shifts in the U.S. Federal Reserve's policy cycle adds further support, the bank said.
Light investor positioning, supportive net bond supply during the summer, attractive valuations and strong long-term risk-adjusted returns also strengthen the investment case, according to the bank, as it assigned Turkish local-currency bonds its highest-conviction rating.
Still, the report identified several risks, including uncertainty over Türkiye's sovereign credit rating, some deterioration in fiscal dynamics and core inflation remaining elevated despite its downward trend.
Among maturities, medium-term government bonds remain the preferred choice, with the expected CBRT easing cycle seen delivering greater gains than longer-dated debt, it noted.
While Türkiye's monthly inflation rose slightly to 1.8% in July, the annual rate continued to decline to 31.8%, official figures showed on Monday.
The central bank has kept its policy rate unchanged at 37% for three consecutive meetings amid increased capital outflows and rising oil prices following the outbreak of the Iran war, while continuing to fund the market through its costlier 40% overnight lending rate.
As inflationary pressures show signs of easing, the central bank is expected to return to normal funding conditions by resuming one-week repo auctions.
According to central bank data, foreign inflows into Turkish bonds extended for a seventh consecutive week in the week ended July 24, bringing the cumulative total to $4 billion.
As of Monday's session, the yield on Türkiye's two-year benchmark government bond stood at 41.82%.
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