Turkish Yields Jump Most in 2 Months on Basci’s Tightening Talk

Turkey’s benchmark bond yields jumped the most in almost two months after central bank Governor Erdem Basci said he may tighten liquidity to curtail “already very strong” domestic demand.

Yields on benchmark notes climbed for the first day in four days after Basci said in London today the bank “could be ready to tighten” by scaling back “lira liquidity.” The rate on two-year notes recorded the biggest retreat in the past 12 months among 20 emerging-market peers tracked by Bloomberg as Turkey was raised to investment grade at Fitch Ratings and the central bank cut interest rates.

“The reports about liquidity tightening measures caused selling in the short-term maturities,” Onder Turker, a fixed-income trader at Finansbank AS in Istanbul, said by e-mail.

Yields on two-year bonds rose as much as eight basis points, or 0.08 percentage point, to 5.77 percent, the biggest jump on an intraday basis since Jan. 4. The yield pared its advance to close at 5.75 percent at 5 p.m. in Istanbul, The lira depreciated 0.3 percent to 1.8039 per dollar, bringing its loss this year to 1.1 percent.

At its last rate-setting meeting on Feb. 19, the bank increased reserve requirements on lira liabilities to 11 percent from 10.8 percent and on foreign currency liabilities to 11.5 percent from 11.1 percent, citing “significant acceleration” in credit growth and saying the moves would withdraw about $2 billion in liquidity from the market.

Yields Plunge

“We are happy with a mild recovery in domestic demand but upon the condition that it is not excessive in a way to hurt financial stability,” Basci said. “The amount of stimulus we provided in second half of 2012 has shown its impact.”

Turkey’s two-year yields dived 345 basis points over the past 12 months.

Basci’s comments signal the central bank will consider “gradually decreasing the lira liquidity which it has provided in plenty for some time,” Tufan Comert, a strategist at Garanti Securities in Istanbul, said in an e-mailed note.

“The reserve requirement hikes should be expected to continue in the central bank’s Monetary Policy Committee meeting on March 26,” Comert added.

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