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Turkey Yields Drop to Record Low as Upgrade Spurs Rate-Cut Bets

Turkey’s bond yields fell to a record on bets the central bank has room to lower interest rates after the nation’s upgrade to investment grade by Fitch Ratings yesterday pushed the lira to the highest in six months.

Yields on two-year benchmark debt fell 5 basis points, or 0.05 percentage point, to 6.89 percent at the in Istanbul, the lowest since at least 2005. The lira gained by 0.3 percent to 1.7756 per dollar, the strongest level on a closing basis since May 7, according to data compiled by Bloomberg.

Fitch boosted Turkey’s foreign-currency ranking to BBB-from BB+ and its outlook to stable, it said in a statement. Turkey’s current-account deficit narrowed for a 10th straight month to the least since 2009 in October as exports to the Middle East and Africa made up for lost sales to Europe. Prime Minister Recep Tayyip Erdogan’s government has cut its debt to 36.5 percent of gross domestic product this year from 74 percent in 2004.

“The lira’s appreciation lifted an obstacle for the central bank to cut interest rates to stimulate the economy,” Ugur Kucuk, a fixed-income strategist at Is Investment Securities in Istanbul, said in e-mailed comments. Fitch’s upgrade “will enable the central bank to lower the cost of funding to 5.50 percent more easily,” Kucuk said.

Central bank Governor Erdem Basci said in a press conference in Istanbul on Oct. 24 the bank can cut the lenders’ borrowing cost to 5.5 percent. Basci varies interest rates daily within a benchmark 5.75 percent rate and a 9.5 percent overnight lending rate.

Funding Cost

The average cost of funding for Turkish lenders fell to 5.74 percent yesterday, the lowest on record, as the central bank boosted cheaper funding after economic growth fell to 2.9 percent in the second quarter from 9.2 percent a year earlier and the inflation rate slid to 7.8 percent in October from a three-year high of 11.1 percent in April.

The Turkish Treasury sold total 2.5 billion liras of benchmark two-year bonds at average yield of 6.9 percent in auction, the lowest cost since at least 1998. The Ankara-based Treasury also sold total 3.1 billion liras of 10-year fixed-coupon debt at 7.74 percent yield. The yield compared with 8.61 percent in previous auction of September 2022 debt on Sept. 24.

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