Turkey Yields Decline to Month-Low, Lira Falls on Rate Cut Bets

Turkish bond yields fell to the lowest level in more than a month and the lira weakened on bets the central bank will cut interest rates at a meeting tomorrow to curb the currency’s gains this year.

Yields on two-year notes slid three basis points, or 0.03 percentage points, to 5.93 percent by the 5 p.m. close in Istanbul, the lowest level since Dec. 19. The lira depreciated 0.2 percent against the dollar to 1.7637 in its second day of declines.

The lira has strengthened 1.1 percent this year, the second-biggest advance among emerging-market currencies in Europe, the Middle East and Africa after the Romanian leu, according to data compiled by Bloomberg. The central bank’s real effective exchange rate index was at 118.3 in December, close to its 120 reading which Governor Erdem Basci said in November would prompt the policy makers to clip any unwarranted currency gain. The gauge measures the lira’s purchasing power relative to those of Turkey’s main trading partners.

The central bank has previously said it deems the index’s 120 level as overvalued for the currency, Sercan Kiliclar, a fixed-income trader at Akbank TAS in Istanbul, said in e-mailed comments.

One-year interest-rate swaps, which indicate investor expectations of borrowing costs, fell one basis point to 6.47 percent today.

The lira strengthened to 1.7530 a dollar on Jan. 17, the strongest level since Feb. 29, on bets Moody’s Investors Service will raise Turkey’s credit rating to investment grade. Moody’s said in November the country was the only nation in Europe it rated with a positive outlook.

‘Systemic Risk’

Excessive currency appreciation increases “systemic risk and can have a damaging effect on macroeconomic and financial stability,” Basci said Dec. 25. The governor has used a rates corridor that allows him to raise or lower the cost of funding to banks daily to control the flow of money and curb the current-account deficit. The central bank lowered the benchmark repurchase rate in December by 25 basis points to a record 5.5 percent.

Four out of 11 analysts surveyed by Bloomberg expect the central bank to lower its overnight rate, while seven forecast the measure will stay at 5 percent.

Renewed appreciation pressure on the lira could prompt the central bank to cut its overnight rate by 25 basis points, while keeping the repurchase rate unchanged, according to an e-mailed note from Istanbul-based BNP Paribas analysts Emre Tekmen and Selim Cakir.

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