Turkey Yields Drop Most in Five Months Before Treasury Borrowing

Turkish bond yields fell the most since August this month before a sale of government securities to help finance this year’s biggest debt repayment.

The yield on two-year benchmark notes has retreated 71 basis points so far this year, heading for the biggest monthly decline in five months, and dropped 21 basis points, or 0.21 percentage point, to 10.30 percent today, the lowest level in a month. The Treasury in Ankara will sell bonds due December 2013 tomorrow, one of six auctions this month to raise 14.4 billion liras ($7.9 billion) in domestic offerings, according to a borrowing program published Dec. 30.

Lira securities are rallying after the central bank more than tripled the minimum lenders can borrow through one-week repurchase auctions to 25 billion liras until Feb. 2, up from a minimum 7 billion liras for the past two weeks. The currency is likely to return 15 percent this year in so-called carry trades, the most among more than 20 emerging-market currencies, according to data compiled by Bloomberg.

“Foreign interest in the auction will be strong,” Ugur N. Kucuk, a fixed-income strategist at Is Investment Securities, Turkey’s biggest brokerage, said in e-mailed comments. “The Turkish lira market is offering a very attractive carry return.”

The lira has advanced 4 percent against the dollar this year, the fourth-best performance among 10 emerging currencies in Europe, the Middle East and Africa, tracked by Bloomberg. Policy makers had more than doubled the cost of funding to rates as high as 12.5 percent to curb the lira’s 18 percent slump last year, the biggest drop worldwide, and cap inflation that accelerated to a three-year high of 10.5 percent in December.

Bond Sales

The Turkish Treasury sold a total of 3.52 billion liras of fixed-coupon bonds maturing Jan. 27, 2016 at an average annual yield of 10.58 percent today.

The Ankara-based Treasury also sold a total net 2.22 billion liras of July 21, 2021 bonds linked to consumer price inflation at a 4.20 percent real yield, in a separate auction and non-competitive sale, the central bank said.

The Treasury sold a net 1.5 billion liras of the 2016 bonds to state institutions. Bids from banks were 2.69 billion liras for the four-year debt with 9 percent annual fixed interest and 2.79 billion liras for the 2021 debt at the auctions.

“The bond auctions this morning went reasonably well,” Luis Costa, emerging market strategist at Citigroup Inc. in London, said in an e-mailed note. “The central bank’s tactics to make liquidity room in the local banking sector by allowing term repo rates to go back to 5.75 percent are indeed working.”

Interest Rate Gap

Prime Minister Recep Tayyip Erdogan said the gap between the central bank’s benchmark interest rate and market rates must close because “the lower we can bring market rates, the slower inflation will be,” Anatolia news agency reported on Jan. 11. The government will make “strong, pointed responses” to a lobby Erdogan said is pressing for higher interest rates, as surging borrowing costs threaten to reduce economic growth.

“The Treasury will be able to borrow successfully tomorrow because it now just needs to sell 3 billion liras of the benchmark bond” to complete its borrowing target, said Murat Yardimci, chief trader at ING Bank AS in Istanbul.

“The line on fighting the interest-rate lobby appears to be helping,” said Arda Kocaman, head of treasury at FinansInvest, an Istanbul-based broker owned by National Bank of Greece SA.

Weak Lira

The lira was the worst performer worldwide last year as the central bank cut interest rates to a record low of 5.75 percent and the current-account deficit hit 10.3 percent of gross domestic product, the highest rate among 60 major economies tracked by the International Monetary Fund. The currency gained 0.6 percent to 1.8197 per dollar at 5:10 p.m. in Istanbul today after the auction results were announced, heading for the strongest level in two-and-half months.

Yields on Turkey’s benchmark debt soared 390 basis points, or 3.9 percentage points, last year in the biggest jump since 2006.

In carry trades investors borrow in countries that have low interest rates and invest in high-yielding currencies. The yield on two-year lira debt compares with less than 0.3 percent for similar-maturity U.S. and German securities.

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