Turkey's Bonds Rally to Three-Month High on Slowing Inflation

  • Yield on 10-year government bonds declines to December-low
  • Turkey’s annual CPI slowed more than anticipated in February

A steeper-than-expected slowdown in inflation sent Turkey’s local-currency government bonds soaring to the highest level in three months on bets a rise in consumer prices has peaked.

The yield on the nation’s 10-year bonds fell 17 basis points to 10.44 percent at 5:10 p.m. in Istanbul, the lowest level since Dec. 9. The yield on two-year debt sank 18 basis points. Turkey’s annual consumer inflation slowed to 8.78 percent in February from an almost two-year high. The median estimate of 21 analysts was 9.4 percent.

The first decline in annual inflation since October came as an increase in food prices slowed and helped ease one of the challenges the central bank had in meeting its own consumer price target. While slowing inflation has boosted appetite for Turkish lira debt, investors will probably remain wary of the regulator’s ability to tame consumer prices until there’s clarity over who might succeed Erdem Basci as governor next month.

“This decline could lead to an improvement in inflation expectations,” said Yarkin Cebeci, an Istanbul-based economist at JPMorgan Chase & Co. in Istanbul. “If this is accompanied by progress in structural reforms and the appointment of a market friendly central bank governor, there could be a fundamental improvement in inflation dynamics, which would encourage us to revise down the inflation forecast.”

JPMorgan sees inflation easing to 7.8 percent in April before stabilizing around 8 percent for the rest of the year.

Core Inflation

While headline inflation slowed, core inflation, which doesn’t include volatile prices like food and energy, inched up nine basis points to 9.72 percent, the highest since July 2014.

The central bank will refrain from lowering interest rates in the near future, according to Morgan Stanley, which remains neutral on Turkish government bonds.

“Our economist’s impression is that central bank is leaning toward keeping rates on hold for the near future, while making any necessary adjustments within the corridor,” London-based strategists including Gordian Kemen wrote in an e-mailed report, referring to the central bank’s daily liquidity operations that it uses to control the cost of bank funding.

If the central bank starts lowering the average cost of bank liquidity, “we expect the front end of Turkish government bonds to outperform,” they said.

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