Turkey Yields Fall to Record on Bets Series of Rate Cuts Coming

Turkey’s bond yields dropped to a record as investors bet a cut in interest rates expected next month will mark the beginning of a series aimed at stimulating the nation’s slowing economy.

Yields on two-year benchmark debt slid 8 basis points, or 0.08 percentage point, to 6.12 percent, the lowest level since at least 2005. The lira depreciated as much as 0.4 percent before paring its loss to less than 0.1 percent at 1.7939 per dollar by 6:16 p.m. in Istanbul.

Turkey’s benchmark yields have slumped 489 basis points this year. The nation’s confidence index for manufacturers fell to 101 in November, the lowest in 2012, the central bank said today. Capacity utilisation for the same month also declined to 74 percent from 74.9 percent in October, the bank said.

“The market is clearly pricing in a rate cut cycle,” Isik Okte, an Istanbul-based strategist at Halk Invest, said in e-mailed comments today. “We expect a 25 basis-point cut in December, and the bond market at these prices has already priced in most of the cut this time, but people are still not taking profits. Once these cuts to the benchmark rate start, they will not end at 25 basis points.”

Lira bonds have rallied 96 basis points this month as Fitch Ratings upgraded Turkey to investment grade on Nov. 5 and central bank Governor Erdem Basci said on Nov. 12 he won’t tolerate any unwarranted currency gain jeopardizing the country’s external balances. He said the central bank will act if an inflation-adjusted measure of lira’s strength showed the currency appreciating to overvalued territory.

Turkey’s economic growth fell to 2.9 percent in the second quarter from 9.1 percent a year earlier.

“This is a clear indication of belief that upcoming central bank rate cuts will last a cycle, and it will not be a one-shot-and-done deal,” Halk Invest’s Okte said.

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