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Turkey Bond Yields Hit Lowest in Four Months on Moody’s Upgrade

Turkish bond yields dropped to the lowest in four months and the lira rose against the dollar after Moody’s upgraded the country’s credit rating to one level below investment grade.

Benchmark two-year yields plunged 8 basis points, or 0.08 percentage point, to 9.01 percent at the close in Istanbul, the weakest level since February, after earlier dropping as much as 17 basis points to 8.92 percent, the lowest since October. Yields on the 10-year dropped 9 basis points to 8.77 percent, the lowest since January 2011. The lira strengthened 0.4 percent to 1.7938 per dollar at 5:45 p.m., up for the seventh straight day in the longest streak of gains since October.

The upgrade to Ba1 had “two main drivers: the significant improvement that we’ve observed in Turkey’s public finances and our observation that the government has improved its shock absorption capacity,” Moody’s analyst Sarah Carlson said in a telephone interview from London after the ratings action today. “Upgrade to investment grade will probably be dependent on the sovereign becoming more resilient to balance of payment shocks,” Carlson said.

Turkey’s two-year bond yields have dropped 224 basis points this year as central bank Governor Erdem Basci tightened monetary policy to support the lira and slow bank lending that contributed to a surge in imports last year, which resulted in an expansion of the current-account deficit. Inflation fell to 8.3 percent in May from 11.1 percent in April, the biggest drop since January 2003. Trade deficit for April narrowed more than expected, contracting for a sixth month, and the current-account gap retreated in April for a sixth month.

Budget Deficit

Prime Minister Recep Tayyip Erdogan’s government cut the budget deficit to 1.3 percent of gross domestic product last year from 3.6 percent a year earlier and state debt to 39 percent from 42 percent, according to Treasury data. The government targets a shortfall of 1.5 percent of GDP this year.

With the upgrade, Moody’s joins Fitch Ratings at placing Turkey one level below investment grade. Standard & Poor’s rates the country two levels below. Fitch has a stable rating outlook for Turkey, while S&P cut its outlook on Turkey’s debt to stable from positive on May 1.

The upgrade today “is a major positive not only for the credit story but for all Turkish assets,” Simon Quijano-Evans, the head of emerging market research for Europe, the Middle East and Africa at ING Groep NV in London, said in an e-mailed report. “It also underlines the ratings convergence story that will continue between western and eastern Europe, especially given the much better fiscal dynamics of the latter, with Turkey probably the best-placed of all.”

Turkey’s central bank provided funding at its minimum policy rate for a 12th day, reducing borrowing costs for lenders. It has been lending at its lowest funding rate of 5.75 percent every day since June 5. It lent 3 billion liras ($1.7 billion) today in its daily repurchase agreements auction at the minimum rate after receiving bids for 14.8 billion liras.

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