Foreign Investors Favor Carry Trade in Türkiye, Avoid Bonds

The debate over foreign capital flows into Türkiye has taken a sharper turn following comments by economist Timothy Ash, who suggested that international investors are comfortable with the current economic management but remain reluctant to enter the domestic bond market. His remarks triggered a pointed response from renowned economist İris Cibre, who characterized the situation as an implicit “confession” about the short-term nature of foreign inflows.

At the center of the discussion lies a critical question: Are foreign investors committed to Türkiye’s long-term financial stability, or are they primarily exploiting short-term yield differentials?

Comfort with Policy Team, Caution on Bonds

According to Ash, global investors are broadly at ease working with Treasury and Finance Minister Mehmet Şimşek and his team. He indicated that markets view the real appreciation of the Turkish lira as a cornerstone of the country’s disinflation strategy. Moreover, he noted that foreign investors are satisfied with carry trade opportunities—profiting from interest rate differentials—but hesitant to commit capital to Turkish government bonds.

This distinction is critical. Carry trade inflows are typically short-term and highly sensitive to shifts in interest rates or currency expectations. By contrast, participation in the bond market often signals deeper, longer-term confidence in fiscal credibility and macroeconomic stability.

Ash’s comments effectively highlighted that while tight monetary policy and high interest rates are attracting foreign funds, those flows may not yet reflect structural trust in Türkiye’s long-term outlook.

İris Cibre Calls It a “Confession”

Responding via social media, renowned Turkish economist İris Cibre delivered a detailed critique of Ash’s framing. She described the remarks as a clear acknowledgment that foreign investors prefer short-term tactical gains rather than long-term exposure.

Summarizing what she believes to be the investor mindset, Cibre wrote: “We are happy with hit-and-run gains, but we are not very willing to put our hands further under the stone.”

Her interpretation suggests that foreign capital is currently engaging in opportunistic positioning rather than making durable commitments to Turkish assets. In her view, avoiding the bond market reflects a limited willingness to assume long-term risk in Türkiye’s economy.

This debate underscores a broader issue: the quality of capital inflows matters as much as their quantity.

Bond Market Liquidity Concerns

Cibre reinforced her argument by pointing to low transaction volumes in the bond market. She cited a specific instance in which, as of 11:30 a.m. on a given day, not a single transaction had occurred in the benchmark government bond.

Such thin liquidity, she argued, may deter foreign investors who fear being unable to exit positions quickly during market turbulence. In emerging markets, liquidity risk can amplify losses during sudden reversals, making bond exposure less attractive compared to more flexible currency-based strategies.

Her assessment implies that foreign investors may perceive exit risk in Turkish bonds as outweighing potential yield benefits.

The Risks of Carry Trade Dependence

While carry trade strategies can deliver strong returns in high-interest environments, they are inherently fragile. The model relies on borrowing in low-interest currencies and investing in higher-yielding assets to profit from the interest differential.

However, currency volatility can quickly erase gains. If exchange rates move sharply against investors, positions can unwind rapidly, triggering broader financial instability.

Cibre issued a stark warning about this vulnerability, stating: “In carry, too, the last one left will freeze—that is being forgotten.”

Her message suggests that while carry trade flows may appear beneficial in the short term, they can reverse suddenly, potentially destabilizing markets if sentiment shifts or global conditions tighten.

What Is Carry Trade?

Carry trade is a financial strategy in which investors borrow in a currency with low interest rates and invest in assets denominated in a currency with higher interest rates. The goal is to capture the interest rate differential, also known as interest arbitrage.

This approach is particularly common in foreign exchange markets. While it can generate attractive returns during periods of currency stability and high yield spreads, it carries significant risks tied to exchange rate fluctuations and liquidity conditions.

For Türkiye, where policy rates have been elevated as part of a disinflation campaign, carry trade inflows have helped support the lira and strengthen foreign reserve buffers. Yet economists warn that overreliance on such flows can create systemic vulnerability.

Structural Confidence vs Tactical Gains

The divergence between carry trade enthusiasm and bond market hesitation reflects a deeper tension in Türkiye’s economic trajectory.

On one hand, high real interest rates and a disciplined monetary stance have restored a measure of market credibility. On the other hand, limited foreign participation in longer-duration assets raises questions about the depth of confidence in fiscal sustainability and macro stability.

The debate between Ash and Cibre ultimately highlights a crucial distinction: short-term capital inflows do not necessarily equate to long-term investment commitment.

As Türkiye continues its tight monetary policy path, the evolution of bond market participation may serve as a more telling barometer of international confidence than carry trade volumes alone.