Turkey’s Bond Yields Climb to Two-Year High Before Auction

Turkish yields reached a two-year high on increased funding costs for banks and on concern Europe’s credit crisis may worsen, raising borrowing costs as the government prepares its biggest bond sales since February.

The Treasury plans to offer bonds due in July 2013 on Nov. 15 as part of 12.2 billion liras ($6.9 billion) in sales this month, the most since the government raised 15.4 billion liras in February, according to its website. The two-year yield climbed 133 basis points in October and reached a two-year high today, according to data compiled by Bloomberg.

Turkish benchmark bond yields increased 33 basis points, or 0.33 percentage points, to 10.25 percent at the 5:00 p.m. in Istanbul, a Turk Ekonomi Bankasi index of the securities showed, the highest level since August 2009.

Yields climbed the most since 2008 last month after the central bank more than doubled borrowing costs for lenders to tackle inflation and shore up the lira. Greece last week named a former central banker to lead the country, while Italy’s President Giorgio Napolitano offered Mario Monti, former European Union competition commissioner, the prime minister post after Silvio Berlusconi resigned.

“Foreign participation in these auctions will be important, so a lot depends on how the European Union news unfolds in the coming days,” Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi AS in Istanbul, said in a report Nov. 11. Turkish “banks facing a liquidity shortage will not be willing to buy bonds at current levels,” he said.

Higher Costs

Turkey’s central bank has pushed up borrowing costs by denying banks access to funding at the benchmark one-week repo rate of 5.75 percent on some days and instead providing it only through the overnight lending rate, at a cost of as much as 12.5 percent.

“It will be a tough auction,” Murat Yardimci, head of trading at ING Bank AS in Istanbul, said in e-mailed comments Nov. 11. “There is not much appetite because of euro-zone problems and books for the year have been closed.”

Turkey also plans to sell six-year floating-rate bonds, four-year fixed-coupon and inflation-linked notes and three-year fixed-coupon debt. Turkey is scheduled to repay 13.4 billion liras in November, according to government data.

The Turkish Treasury sold a total net 1.18 billion liras ($660 million) of June 4, 2014 fixed-coupon bonds at 10.01 percent average yield in an auction and earlier non-competitive sale today. The Treasury in Ankara also sold a total net 1.36 billion liras of May 4, 2016 bonds linked to inflation at an average real yield of 2.54 percent.

The Treasury will have to pay “much higher yields” to meet its November domestic borrowing target, Tufan Comert, strategist at Garanti Securities, said in an e-mailed note to clients, after today’s auctions.

“The central bank is implementing a monetary policy on a daily basis and this reduced predictability in the bond market seriously,” Comert said. “The current level of yields is not at a level to compensate for this uncertainty.”

The lira depreciated 0.4 percent to 1.7840 per dollar, falling for the first day in three.

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