Turkish yields rebounded from their lowest on record as interest rate cut bets were pared on estimates a central bank gauge showed the lira is no longer overvalued.
Yields on two-year benchmark notes fell to the lowest since at least 2005 yesterday after Economy Minister Zafer Caglayan asked the central bank not to allow the lira to appreciate “excessively”. The lira weakened to its lowest in almost a month yesterday on Caglayan’s comments, possibly pushing the Real Effective Exchange Rate Index, below a threshold monitored by the central bank, according to Sekerbank AS and Turk Ekonomi Bankasi AS.
“I think the market got overexcited about the rate cuts,” Ibrahim Aksoy, an economist at Seker Investment Securities in Istanbul, the brokerage unit of Sekerbank AS, said by telephone. He estimates the current REER should now be between 119.6 and 120 after the lira’s fall.
The index, which the bank uses to monitor the currency against Turkey’s trade partners, rose to 120.16 in January from 118.08 the previous month, spurring speculation that the Monetary Policy Committee will reduce interest rates at its meeting on Feb. 19. A reading of 120 or above signals excessive currency strength, according to the central bank. The reading for February will be announced on March 5.
Yields on two-year notes rose 4 basis points, or 0.04 percentage point, to 5.69 percent by 2:56 p.m. in Istanbul. The lira appreciated 0.1 percent against the dollar to 1.7717, extending this year’s advance to 0.7 percent.
“The REER is slightly below 120 according to my calculations,” Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi AS in Istanbul, said in e-mailed comments. The central bank won’t do anything on interest rates “for now but the exchange rate developments until Feb. 19 will be important.”
Central bank Governor Erdem Basci has managed the lira and Turkey’s credit growth by adjusting interest rates daily through a corridor he introduced in October 2011. The governor reduced the overnight lending and borrowing rates by 25 basis points each to 8.75 percent and 4.75 percent, respectively, on Jan. 22. A “measured rate cut to the interest-rate corridor or policy rate is possible if the REER appreciates excessively,” Basci said Jan. 29.
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