Turkish Bonds Rally as Developing Europe's Highest Yields Beckon

  • 10-year yields fall to 3-month low after ECB stimulus measures
  • Stock gauge extends longest stretch of gains since 2013

Turkish bonds rallied, sending yields to a three-month low, on speculation European Central Bank stimulus will increase the allure of the highest-paying government bonds among major economies in developing Europe.

The rate on 10-year local-currency notes fell 10 basis points to 10.20 percent on Thursday, the best performance among regional peers. That compares with yields of less than 3 percent in Poland and 0.31 percent in Germany. Turkey’s benchmark stock index also climbed, extending the longest stretch of gains in almost three years.

Turkey may be among the biggest beneficiaries of emerging-market inflows resulting from the ECB’s decision to expand its bond-buying program by 20 billion euros ($22 billion) to 80 billion euros a month, as well as cutting its deposit rate to minus 0.4 percent. Inflation slowed more than expected last month to 8.8 percent, opening up more monetary-policy options to the nation’s central bank.

Bond yields have also come down significantly so "the question is whether this would trigger a rate cut by Turkish central bank and another round of buying sprees," Gulsen Ayaz, a director of institutional equity sales at Deniz Yatirim Menkul Kiymetler in Istanbul, said by e-mail. Policy makers have kept benchmark borrowing costs on hold for a year as a drop in the lira spurred inflation.

Selloff Signal

Not all Turkish assets benefited from the ECB decision after Mario Draghi said that while the central bank can cut interest-rates further, it isn’t likely to. The lira fell 0.4 percent to 2.9023 per dollar after earlier climbing above its 200-day moving average, a level it hadn’t surpassed on a closing basis since 2014.

The 14-day relative-strength index for Turkey’s main stock gauge also climbed to 73.5 on Thursday following a nine-day rally, taking it above the threshold of 70 level that some technical analysts see as a sign that an asset is poised to reverse.

“Turkish equities might take a breather,” said Gulsen Ayaz, a director of institutional equity sales at Deniz Yatirim in Istanbul.

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