Turkey Bond Yields Rise as Lira in Worst Set of Drops Since 2002

Turkey’s bond yields rebounded from a record low on investor expectations the lira’s longest losing streak in 11 years will dissuade the central bank from cutting interest rates.

Yields on two-year benchmark notes rose 14 basis points, the most on a closing basis since March 19, to 4.93 percent at the 5 p.m. close in Istanbul. The rate fell to a record 4.79 percent on May 17. The currency depreciated 0.3 percent to 1.8465 a dollar, set for its lowest level since June 4. The lira is heading for an eighth day of declines, its longest stretch of losses since May 2002.

The currency slid 2.9 percent this month as the central bank cut interest rates by a larger-than-expected 50 basis points after the regulator’s preferred currency measurement, known as REER, rose to 121.10 last month. That’s the highest level since January 2011 and above the 120 threshold at which the monetary authority says it would consider the currency overvalued.

“If the weakening in the lira accelerates and brings the REER below 120, then the possibility of a rate cut will disappear,” Onder Turker, a fixed-income trader at Finansbank AS in Istanbul, said in e-mailed comments.

Moody’s Investors Service upgraded Turkey to investment grade last week, fueling bets the central bank may cut rates further to slow a surge in capital inflows. The central bank lent 200 million liras ($108 million) in its one-week repurchase agreements auction today at 4.5 percent, the minimum it can offer in a day.

Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi AS (TEBNK), estimates the current level of REER is 118.5. “The central bank is lowering the excess liquidity,” Isik said in e-mailed comments.

Three-month volatility for the lira rose to 5.47 percent from 5.44 percent on May 17, the lowest among major emerging markets in Europe, the Middle East and Africa, according to data compiled by Bloomberg.

Lira forwards show the currency will weaken to 1.89 a dollar by end of the year, according to data compiled by Bloomberg. It will reach 1.8850 in December, according to currency futures traded in Istanbul.

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

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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