Turkey Bond Yields Rise as Lira Loss Damps Rate Cut Speculation

Turkish benchmark bond yields rose for a second day as a weakening lira led investors to bet the central bank will keep interest rates unchanged.

Bond yields rose two basis points to 5.77 percent, up from a record low of 5.64 percent on Feb. 20. The lira declined 0.2 percent to 1.8016 per dollar, extending its fall in the past month to 2.2 percent. It also dropped 0.2 percent to 2.07 against an equally-weighted basket of dollars and euros.

A weakening lira reduces expectations that the central bank may cut rates at its next meeting on March 26 as it’s seeking to stem unwanted currency appreciation, according to Gulay Girgin, chief economist at Ata Invest in Istanbul. The central bank is monitoring the lira against Turkey’s main trade partners, saying that excessive appreciation could lead to a monetary policy response.

“Investors are now pricing in that the central bank will not cut at the next meeting, so we’re seeing an increase in the benchmark,” Girgin said by phone today. “The lira is hovering around 2.07 to 2.09 against the lira/dollar basket, and this is okay for the central bank.”

Yields on benchmark two-year debt jumped the most in almost two months on March 1 after bank Governor Erdem Basci said he may tighten liquidity to curtail domestic demand. Yields have dived 348 basis points over the past 12 months, the biggest decline in emerging markets.

The lira dropped 18 percent against the dollar in 2011, then strenghthened 6 percent last year. It has declined 1 percent this year.

Basci’s policies of varying funding banks at three main interest rates while making frequent changes to reserve requirements have helped make the lira the least volatile among eight currencies in Eastern Europe, the Middle East and Africa in the last three months, according to data compiled by Bloomberg.

“The risk of an abrupt foreign exchange movement remains high,” Citigroup Inc. economist Ilker Domac said in an e-mailed report today, citing Turkey’s wide current-account deficit and the “low level of interest rates.”

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