Turkish Bonds Decline as Central Bank Keeps Rates Unchanged

Turkey’s bonds fell, trimming a monthly rally, as policymakers left borrowing rates unchanged in the final interest-rate decision before parliamentary elections next month.

The yield on two-year government notes jumped 17 basis points to 10.34 percent at 3:58 p.m. in Istanbul, after falling 34 basis points yesterday. The rate has dropped 121 basis points this month amid a broader rally in developing nations, reducing the need for Turkey’s central bank to act to relieve pressure on this year’s second-worst performing currency in emerging markets. The lira weakened after the decision.

Policy makers have left interest rates on hold since February even as inflation accelerated and the lira depreciated to a record as the threat of higher U.S. borrowing costs, escalating security risks and political deadlock crushed investor sentiment. The currency has since recovered some ground as investors starting paring back bets for a Federal Reserve interest-rate increase this year amid signs that the slowdown threatens the U.S. recovery.

“Pressure on the central bank to tighten monetary policy to stabilize the battered currency has eased,” Piotr Matys, a strategist at Robobank in London, said by e-mail. “The key question from the perspective of the Turkish central bank is weather the lira’s relief rally is just the beginning of a sustainable recovery or is it just yet another short-term correction from oversold levels.”

Matys expects the lira will depreciate past 3 per dollar by year-end, “as it will take far more evidence from the U.S. economy to delay the Fed first hike until 2016,” he said.

The central bank held its one-week repurchase rate at 7.50 percent, according to a statement accompanying the central bank decision. It kept its overnight lending and borrowing rates unchanged at 10.75 percent and 7.25 percent, respectively. The lira weakened 0.3 percent to 2.9087 per dollar.

Policymakers removed a phrase about maintaining a flat yield curve from today’s statement. Previous statements contained the line: “A cautious monetary policy stance will be maintained by keeping a flat yield curve, until there is a significant improvement in the inflation outlook.”

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