Turkish bonds fell, sending two-year yields to their biggest weekly increase in six months, before presidential elections and a Moody’s Investors Service review. Stocks and the lira rebounded.
The two-year yield rose four basis point to 9.36 percent, increasing 62 basis points over five days. The Borsa Istanbul 100 Index rose 0.5 percent, trimming this week’s slide to 3.5 percent, the most since January. The lira strengthened 0.5 percent to 2.1567 per dollar at 7:07 p.m. in Istanbul, paring this week’s drop to 1.1 percent.
Lira assets have come under pressure this week as the nation in two days faces its first direct presidential election and after U.S. President Barack Obama authorized air strikes against extremist Islamic militants in Iraq, which shares a border with Turkey. Moody’s is scheduled to release an update on Turkey today.
“U.S. involvement in Iraq was one of the reasons for the weakness in equities,” Vedat Mizrahi, head of research at Unlu Securities said by phone from Istanbul. “Then there’s the expectations regarding a negative comment from Moody’s tonight. Also, the economic management is quite likely to change after the elections and investors were quite happy with the current crew.”
Borrowing in dollars to fund purchases of lira debt lost 0.5 percent this month, second only to the ruble in developing Europe and Africa.
Moody’s, which raised the sovereign to its lowest investment grade Baa3 rating in May 2013, cut the outlook to negative 11 months later.
Moody’s cited political uncertainty, lower global liquidity and pressure on external financing for its outlook revision in April. Economy Minister Nihat Zeybekci said Aug. 5 he would be surprised if the rating company’s assessment was positive, according to an interview on CNBC-e television.
“After Economy Minister Zeybekci’s comments, the perception that maybe a downgrade is coming was created,” Fatih Keresteci, an Istanbul-based strategist at HSBC Holdings Plc, said in an e-mailed report. “Even though we don’t expect a downgrade from Moody’s in any way, such an announcement would take Turkey out of the class of investable economies. The effect on the markets could be very strong.”
Fitch Ratings affirmed its BBB- investment grade rating for Turkey, with a stable outlook, in April, while Standard & Poor’s ranks the sovereign BB+, its highest junk score.