Why Global Investors Are Zeroing In on Turkey’s Short-Term Bonds

As global investment firms scan emerging markets for high-yielding assets with improving macro fundamentals, Turkey’s government bond market has re-entered the spotlight. Fidelity International, one of the world’s most prominent asset managers, is positioning itself ahead of what it sees as a structurally evolving interest rate environment in Turkey. The firm currently favors short-term Turkish government securities, particularly in the 1- to 3-year maturity range, and may extend its exposure into longer tenors if inflation cools enough to allow the Central Bank of the Republic of Türkiye (CBRT) to begin lowering policy rates by 2026.

Fidelity portfolio manager Philip Fielding explains that Turkish yields stand out across the global emerging-market universe. According to him, “Turkish bonds are among the highest-yielding emerging-market bonds we monitor, and if the current policy mix continues, our total return projections for Turkey’s local markets will be higher than in many other EM countries.” This assessment reflects a broader shift among institutional investors, who are once again engaging with Turkey’s local assets, driven by a more conventional macroeconomic orientation and strengthening policy credibility.

Why Fidelity Prefers the Short End of the Curve

Fielding notes that Turkey’s yield curve has turned inverted, a structure typically associated with markets where inflation is expected to fall steadily. Investors are therefore drawn to shorter maturities, where yields are elevated yet duration risk is limited. As Fielding puts it, “Local-currency bonds, especially the short-dated ones like the 1- and 3-year, remain highly attractive.”

The inversion is a direct signal from the market: investors expect inflation to decelerate. If disinflation progresses in line with current expectations, shorter maturities offer the best risk-adjusted entry point before longer-term rates begin realigning with the macro outlook. According to Fielding, “The market expects inflation to decline in the medium term, so the yield curve has inverted. We believe the Central Bank can cut policy rates in 2026.”

This perspective also aligns with broader external analyses. Turkey’s economic team has emphasized tighter monetary conditions, fiscal consolidation, and efforts to stabilize expectations — all factors that international investors closely track.

Carry Trade Appeal: Why Lira Assets Stand Out

Another factor drawing Fidelity toward Turkey is the strong potential for carry-trade returns. With nominal yields far above many comparable emerging markets, Turkey offers one of the most favorable environments globally for carry strategies — provided that currency volatility remains contained.

Fielding highlights that Turkish bonds may outperform FX-based carry positions if yield compression begins: “Bonds, especially if the curve normalizes or becomes less inverted, could outperform simply taking carry through FX markets.”

This is a critical point for global investors. While FX carry can be attractive, bonds provide a double channel for returns:

• High nominal yields

• Potential capital gains if yields fall

If the CBRT transitions into an easing cycle in 2026, bondholders could benefit not only from carry but also from price appreciation. This is precisely why Fidelity is considering extending its duration exposure once inflation data provides clear confirmation.

What Could Unlock Longer-Term Buying?

The key trigger is sustained, predictable disinflation. Fidelity’s strategy suggests that while short-term bonds already offer substantial compensation for risk, long-term bonds become compelling only when inflation expectations anchor firmly lower. A credible multi-year disinflation path would allow investors to lock in high real yields at the long end before policy rates begin to fall.

Fielding reiterates this by emphasizing that the firm is prepared to buy longer maturities under the right conditions: continued disinflation, a stable macro policy framework, and a clear communication strategy from the CBRT.