Turkish Bond Yields Drop to Nine-Month Low on Cheaper Funding

Turkish bond yields declined for an eighth day to the lowest in nine months after the central bank extended its cheaper funding policy and the European Central Bank and China cut interest rates, lowering borrowing costs.

Yields on two-year benchmark debt fell 11 basis points, or 0.11 percentage point, to 8.06 percent at the close in Istanbul, the weakest level since Sept. 20. The lira slid 0.1 percent to 1.8087 per dollar at 6:12 p.m. in Istanbul, depreciating for a second day and the least since June 28.

The central bank provided liquidity today at the lowest 5.75 percent policy rate for a 23rd consecutive day, cutting the average funding cost to 8.42 percent, the lowest since May 3. Governor Erdem Basci said on June 28 he may revise the year-end inflation rate forecast of 6.5 percent toward the official target of 5 percent. Turkey’s economy contracted 0.4 percent in the first quarter.

“The central bank is lowering the effective cost of funding since June and the market is pricing that the easing will continue,” Ugur Kucuk, a fixed-income strategist at Istanbul-based Is Securities, said in e-mailed comments.

The ECB and the People’s Bank of China today cut their benchmark borrowing costs to stimulate demand. The Bank of England raised the size of its asset-purchase program, pressing ahead with monetary easing.

The decline in Turkish economic growth is the first since gross domestic product shrunk 5.5 percent in the first quarter of 2009 and compares with a 0.4 percent expansion in the last three months of 2011.

Turkey’s capacity utilization slid to 74.6 percent in June from 76.7 percent a year earlier, according to a central bank report on June 25, pointing to increasing output gap in the economy. Its inflation rate advanced to 8.9 percent in June from 8.3 percent in May, beating the median estimate of 9.5 percent from nine economists in a Bloomberg survey.

Basci introduced an interest-rate corridor in October to execute the bank’s unorthodox monetary policy, switching between rates of 5.75 percent and 11.5 percent on a daily basis to tame inflation and rein in the current-account deficit by curbing credit growth.

To contact the reporters on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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