Turkey Yields Fall Most Since 2010 After Fed Cuts Funding Cost

Turkish bond yields fell to their lowest since May 2010 after the Federal Reserve cut the cost of emergency dollar funding for European banks and Turkey’s central bank said its monetary policy could control inflation.

Yields on the two-year benchmark bond dropped 46 basis points, or 0.46 percentage point, to 10.39 percent at the 5 p.m. close in Istanbul. The lira gained 1.3 percent to 1.8278 per dollar, advancing to the strongest level in nine days and paring this year’s losses to 16 percent.

The central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements, the Federal Reserve said, and agreed to make other currencies available as needed. Turkey’s central bank chief Erdem Basci said the bank has tight monetary policies in place to deal with a “significant” acceleration in inflation in the next two months and sees no need to adjust its interest-rate corridor.

“We see no need to widen the rates corridor” within which the bank adjusts borrowing costs for lenders, Basci said. “The measures to tighten monetary policy will achieve the 5 percent goal for 2012 inflation, which will start slowing at the start of next year.”

Basci “is saying the liquidity is tight enough to reduce inflation,” Ugur N. Kucuk, a fixed-income strategist at Is Securities said in e-mailed comments. “This is not bad news for the bond market.”

Positive Statement

Since Basci took office in April, the central bank has sought to combine inflation targeting with measures designed to absorb the shock of volatile capital inflows sparked by Europe’s debt crisis. Basci on Oct. 26 announced new policies that enable him to vary bank borrowing costs on a daily basis in the corridor between the benchmark rate of 5.75 percent and 12.5 percent.

“The central bank’s statement is positive because it in a way determined the ceiling for interest rates,” Yagiz Oral, a fixed-income trader at Denizbank AS, said in e-mailed comments.

The extra yield investors demand to hold Turkish debt rather than U.S. Treasuries fell 10 basis points to 380 today, according to JPMorgan Chase & Co.’s EMB Global Index.

Yields on Turkish government two-year notes climbed to 10.9 percent yesterday from 8.4 percent at the end of September, the largest increase among 16 developing nations tracked by JPMorgan Chase & Co., on concern policy makers won’t curb inflation and will keep benchmark borrowing costs on hold. Investors withdrew as inflation exceeded the central bank’s target and policy makers introduced a dual interest-rate system to reduce lending, support the lira and shield Turkey’s economy from Europe’s woes.

Fastest Inflation

Turkey, the seventh-largest developing nation by gross domestic product, faces the same challenges as other emerging markets as Europe’s sovereign debt crisis slows the region’s economy and reduces investor demand for riskier assets. What makes Turkey different is the central bank’s attempt to stem the fastest inflation in a year without damping GDP growth that slowed to 8.8 percent in the second quarter from 11.6 percent in the first three months of 2011.

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