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Turkey Yields Drop Most in 3 Months on Basci’s Rate-Cut Comment

Turkey’s bond yields dropped the most since August and the lira weakened after central bank Governor Erdem Basci said he may cut the lower end of his interest-rate corridor to curb unwarranted lira appreciation.

Two-year benchmark bond yields fell 17 basis points to 6.57 percent, the lowest level since at least 2005, extending this year’s slump to 444 basis points. The lira slid 0.2 percent to 1.7898 per dollar by 5:05 p.m. in Istanbul. It lost 0.1 percent to 2.0328 against the equally-weighted euro and dollar basket.

Basci may cut the 5 percent overnight borrowing rate if the appreciation pressure on the lira builds, he said in an interview on SkyTurk360 TV today. The lira jumped to its strongest level since May on Nov. 6 after Fitch Ratings boosted Turkey to investment grade. The governor will act if the currency’s gain threatens to worsen the current-account deficit, Gulay Girgin, an economist at Oyak Securities in Istanbul, said in an e-mailed note today.

“The lira weakened against the euro/dollar basket after the central bank said it could cut the policy rate and the lower end of the interest rates,” Murat Yardimci, the head of trading at ING Bank As in Istanbul, said in e-mailed comments.

Turkey’s current-account deficit narrowed for a 10th consecutive month to $1.2 billion in August, the smallest since 2009.

Rating Boost

Today’s decline in the lira pared its gain this week to less than 0.1 percent and two-year bond yields extended their advance to 6.8 percent in the five days as Fitch boosted Turkey’s foreign-currency ranking one step higher to BBB- with a stable outlook on Nov. 5. A second rating upgrade could trigger at least $2 billion in inflows through entry into benchmark investment-grade indexes, Barclays Plc said in a note yesterday.

The central bank sold one-month repurchase agreements at a record low rate of 5.59 percent at an auction today. The average rate of funding for lenders fell to 5.74 percent yesterday, a record, and less than the bank’s one-week benchmark rate of 5.75 percent.

“The central bank’s effective interest rates have already fallen below the policy rate,” Bulent Topbas, a fund manager at Strateji Menkul Degerler in Istanbul, said in e-mailed comments.

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