Lira Falls Most in 5 Weeks on U.S. Budget as Yields Rise on Tax

The Turkish lira weakened the most in more than five weeks as stalling U.S. budget talks reduced appetite for riskier assets and bond yields climbed due to concern about extra cigarette taxes that will lift inflation.

The lira lost 0.5 percent against the dollar at 1.7960 at 5:04 p.m. in Istanbul, the biggest depreciation since Nov. 12, paring this year’s gains to 5.3 percent. Yields on benchmark debt rose one basis point, or 0.01 percentage point, to 6.02 percent, the fourth day of increases.

“Investors -- predominantly equity investors -- bought a lot of emerging market equities in the past two weeks and I think they are slowing down naturally,” Koon Chow, the head of emerging market strategy at Barclays Capital, said in e-mailed comments from London.

Yields on Turkey’s two-year benchmark debt fell 501 basis points this year, the biggest slump globally, as the central bank cut the average cost of funding for lenders to a record low of 5.56 percent, down from 11.93 percent on Jan. 6. Foreign investors added $17.2 billion to their holdings of Turkish bonds and $6.3 billion to their ownership of stocks this year, bringing their total holdings to a record high of $132 billion.

U.S. House Republican leaders scrapped a plan to allow higher taxes, adding to concern that there will be no agreement to prevent tax increases and spending cuts -- the so-called fiscal cliff -- from taking effect in January.

“This is happening at the same time that other investors are taking profits,” Chow said.

The government plans to increase taxes on cigarettes, bringing charges closer in in line with European countries, Finance Minister Mehmet Simsek said in an interview with CNBC-e television in Ankara yesterday.

Breakeven Rate

The one-year breakeven rate, a gauge of investor inflation expectations that show the yield gap between fixed-rate bonds and those indexed to consumer prices, advanced for a fourth day to 7.94 percent today. The Turkish central bank targets 5 percent inflation for next year.

“A rise in tobacco prices in January, if it materializes, could hurt inflation dynamics,” Bugra Bilgi, a fund manager at Garanti Asset Management in Istanbul, said in e-mailed comments.

Turkish bond yields jumped 28 basis points this week in the biggest weekly increase since September after the central bank, led by Governor Erdem Basci, kept the bottom end of its so-called rates corridor unchanged at 5 percent three days ago.

The median estimate of seven economists surveyed by Bloomberg was for a 25 basis-point cut. Basci maintained the overnight lending rate at 9 percent and lowered the one-week repurchase rate by 25 basis points to 5.5 percent, in line with estimates.

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