Turkey Yields Fall Most in 5 Months on Interest Rate Cut Signal

Turkish bond yields dropped the most in more than five months after the central bank said it may narrow the so-called interest-rate corridor, reducing the appeal of lira-denominated assets.

Yields on two-year benchmark debt sank 20 basis points, or 0.20 percentage point, to 7.74 percent at the close in Istanbul, the biggest decline since March 8. The lira gained 0.1 percent to 1.7968 per dollar, appreciating for a second day.

Turkey’s monetary policy committee kept both ends of the corridor unchanged and held the benchmark one-week repo rate at 5.75 percent today, in line with the forecast of all nine economists surveyed by Bloomberg. It may narrow the rates band - -5.75 percent to 11.5 percent -- “gradually in the coming period,” according to the central bank. The policy of flexible interest rates was introduced in October to reign in credit growth and control inflation.

“Although this action was expected, we are seeing a loosening in yields because it was stated so openly,” Gizem Oztok Altinsac, an economist at Garanti Investment, said in an e-mailed note.

The central bank raised the proportion of lira reserves lenders can keep in foreign exchange to 60 percent from 55 percent and in gold to 30 percent from 25 percent.

The change in reserve requirements may add as much as $7.3 billion to the country’s foreign exchange reserves and increase liquidity in the market by 5.6 billion liras ($3.1 billion)

“It appears that the increased lira liquidity provided to the system will affect the short-end of the yield curve positively,” Ali Cakiroglu, a strategist at HSBC Private Bank in Istanbul, said in an e-mailed note.

To contact the reporter 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