Turkish yields recovered from their lowest on record and the lira gained as investors pared bets of an interest-rate cut after the estimated level of a central bank gauge showed the currency is no longer overvalued.
Yields on two-year benchmark notes fell to the lowest since at least 2005 yesterday after Economy Minister Zafer Caglayan called on the central bank to not allow the lira to appreciate “excessively.” The currency sunk to its lowest level in almost a month yesterday on Caglayan’s comments, pushing the Real Effective Exchange Rate Index below a threshold that determines whether the currency is overvalued, according to Sekerbank AS and Turk Ekonomi Bankasi AS.
“The market got overexcited about rate cuts,” Ibrahim Aksoy, an economist at Seker Investment Securities, the brokerage unit of Sekerbank, said by telephone from Istanbul. Aksoy estimates the REER has fallen to between 119.6 and 120 after the lira’s depreciation yesterday.
The REER rose to 120.16 in January from 118.08 in the previous month, spurring speculation the Monetary Policy Committee will reduce interest rates at its meeting on Feb. 19. A reading of 120 or above signals excessive currency strength, according to the central bank, which will announce the reading for February on March 5.
Yields on two-year notes rose 4 basis points, or 0.04 percentage point, to 5.69 percent by the 5 p.m. close in Istanbul. The lira appreciated 0.2 percent against the dollar to 1.7703, extending this year’s advance to 0.8 percent.
The REER is slightly below 120, Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi AS in Istanbul, said in e-mailed comments. The central bank won’t change interest rates “for now but the exchange rate developments until Feb. 19 will be important,” Isik said.
Central bank Governor Erdem Basci has managed the lira and Turkey’s credit growth by adjusting interest rates daily through a corridor he introduced in October 2011. The governor reduced the overnight lending and borrowing rates by 25 basis points each to 8.75 percent and 4.75 percent, respectively, on Jan. 22. A “measured rate cut to the interest-rate corridor or policy rate is possible if the REER appreciates excessively,” Basci said Jan. 29.