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Turkey Yield Curve Normalizes at Short-End as Funding Costs Drop

Yields on one-year Turkish debt fell below two-year bonds for the first time in 1 1/2 months as the lira’s advance encouraged the central bank to cut the lenders’ borrowing costs.

The yield on two-year debt reached 9.60 percent today, 27 basis points above that of its one-year counterpart. This is in contrast with the one-year yield being 75 basis above the two-year’s as of Jan. 2, resulting in an inverted curve over the one- and two-year maturity.

The lira strengthened 4.7 percent this year against the equally-weighted dollar and euro basket, and appreciated 2.9 percent last week against the dollar after the U.S. Federal Reserve forecast “exceptionally low” interest rates through 2014 and the Turkish central bank sold dollars in direct sales and conducted daily auctions in January.

“ The bank is closely watching the lira basket and with this below 2.10 they are adopting a dovish stance again,” Gyula Toth, Vienna-based chief strategist for emerging Europe, the Middle East and Africa at UniCredit SpA, said in e-mailed comments today. “This will continue until the basket is firm and global risk mood is O.K.”

Inflation at 10.5 percent in December touched a three-year high and prompted the central bank to halt funding at its lower lending rate. The bank refrained from funding at 5.75 percent between Dec. 28 and Jan. 10, forcing banks to borrow at rates as high as 12.5 percent. The bank has been lending at its lower rate after Jan. 10.

The currency weakened 18 percent last year in the worst performance worldwide after a current-account deficit at 10 percent of gross domestic product hurt investor sentiment. Its depreciation also contributed to a rise in inflation.

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