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Turkey Yields Sink Third Day to 10-Month Low on Rate Cut Bets

Turkish bond yields declined for a third day to their lowest in 10 months on speculation the central bank may trim the upper end of its interest rate corridor at the monetary policy committee meeting tomorrow.

Yields on two-year benchmark debt fell six basis points, or 0.06 percentage point, to 7.83 percent, the lowest on a closing basis since Sept. 8.

Governor Erdem Basci spurred expectations of a cut in the 11.5 percent overnight rate when he said the central bank may reduce its inflation estimate for 2012 toward 5 percent from 6.5 percent on July 6. Turkey’s inflation has slowed from a 3 1/2-year high in April as the economy shrank in the first quarter. The bank will leave its one-week repo rate of 5.75 percent unchanged, according to a Bloomberg survey of economists.

“There is room to trim the overnight lending rate by 50 basis points to 11.00 percent given that the outlook for CPI improved, first-quarter GDP growth was soft, the current-account deficit continues to narrow and we witnessed further deterioration in the outlook for the global economy,” Piotr Matys, a London-based economist at 4Cast Ltd., said in e-mailed comments yesterday.

The lira appreciated for the fourth day, trading less than 0.1 stronger at 1.8042 per dollar at 5:12 p.m. in Istanbul. The cost of locking in borrowing for two years using interest-rate swaps fell to 8.49 percent today, the lowest level since Oct. 14, on bets average rates will drop.

Funding Cost

“We are expecting cut of the overnight lending rate of up to 100 basis points,” said Daniel Lenz, chief strategist for emerging markets at DZ Bank AG in Frankfurt. “The market expects 50 basis points but the Turkish central bank often surprised by acting more aggressively than estimated.”

The average cost of funding for banks fell to 7.83 percent yesterday, the least since April 10, from 10.2 percent on June 5. The borrowing costs have declined as the central bank has lent at its lowest policy rate of 5.75 percent for the past six weeks, the longest run of cheap lending since March 21. It provided 1.5 billion liras ($829.6 million) at its cheapest rate today.

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