Turkey Bond Yields Decline to Month-Low as Rate Cuts Spur Demand

Turkey’s bond yields fell to the lowest level in more than a month and the lira weakened as a cut in the central bank’s overnight interest rates yesterday fueled demand for short-maturity local currency debt.

Yields on benchmark two-year notes slid for a fourth day, declining six basis points, or 0.06 percentage point, to 5.84 percent, the lowest since Dec. 18. The lira depreciated less than 0.1 percent against the dollar to 1.7694 by 5:09 p.m. in Istanbul in its fourth day of losses.

The central bank’s Monetary Policy Committee reduced its overnight borrowing and lending rates by 25 basis points each on concern the lira may become overvalued as Turkey’s stock and bond markets draw in money on bets of a second upgrade by a rating company this year. One-year interest-rate swaps, which indicate investor expectations of borrowing costs, fell 36 basis points to 6.34 percent in the biggest drop since February.

“When short-term interest rates are reduced, naturally short-term debt yields fall as well,” Selim Gulkan, a fixed-income trader at Turk Ekonomi Bankasi AS in Istanbul, said in e-mailed comments.

Fitch Ratings raised Turkey to investment grade for the first time in 18 years in November, helping the lira close last year 6 percent stronger.

Before this week, Turkey’s currency had gained almost 2 percent in a month against the dollar. Central bank Governor Erdem Basci said he’s monitoring an index of the currency’s real exchange rate, weighted against Turkey’s trading partners, and may act to weaken the lira if it appreciates. As capital inflows accelerate, bank credit has started to grow faster than expected, the central bank said yesterday.

Lira Appeal

“The central bank limited the attractiveness of the lira,” Egemen Candir, research director at Integral Securities in Istanbul, wrote in an e-mailed note today. “This can be seen as intervention in the lira’s appreciation.”

Basci will cut the overnight borrowing rate to 4 percent by March 31, after lowering it to 4.75 percent from 5 percent yesterday, said Ahmet Akarli, an economist at Goldman Sachs Group Inc. in London, who was the only one to correctly predict yesterday’s reductions among 12 economists surveyed by Bloomberg. The central bank will reduce the lending rate by 25 basis points, after cutting it a quarter percentage point to 8.75 percent, he wrote in a report.

The central bank aims to keep loan growth within a 14 percent to 15 percent range, Deputy Governor Turalay Kenc said last week. Credit was expanding at a 17 percent annual pace as of Jan. 11.

Turkey’s economic growth slowed to about 3 percent last year, less than half its 2011 pace. That helped bring inflation down to 6.2 percent last month, the lowest in more than a year.

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