Turkey Bond Yields Drop to Record on Moody’s Investment Grade

Turkey’s bonds rallied, sending yields to all-time lows, after Moody’s Investors Service raised the country to investment grade for the first time in two decades, fueling expectation of capital inflows. The lira weakened on speculation the central bank will cut rates.

Yields on two-year benchmark lira bonds fell as much as 19 basis points, or 0.19 percentage point, to a record 4.61 percent and closed 1 basis point lower at 4.79 percent at 5 p.m. in Istanbul. The rates have plunged 136 basis points this year. Ten-year yields dropped below 6 percent for the first time.

Moody’s lifted Turkey’s government bond ratings by one step to Baa3, the lowest investment-grade ranking, citing “recent and expected future improvements in key economic and public finance metrics,” according to its statement yesterday. Fitch Ratings raised the nation to investment grade in November.

“New channels of fund flows might emerge, especially those funds that have so far been unable to invest in a country with a junk status,” Tevfik Aksoy, the chief economist for central and eastern Europe, the Middle East and Africa at Morgan Stanley in London, wrote in an e-mailed note.

The Borsa Istanbul 100 index rallied as much as 1.3 percent to a record before trading 0.3 percent higher at 92,257.45 as of 5:22 p.m. in Istanbul, bringing its advance this year to 18 percent.

The lira weakened 1 percent to 1.8417 per dollar, depreciating for a seventh day, its longest losing streak since June 2011.

Index Trigger

The Moody’s upgrade is likely to push the central bank to continue cutting rates and raise lenders’ reserve requirements, Deniz Celik, an analyst at Finansbank, wrote in e-mail.

Turkey’s central bank reduced interest rates by a larger-than-expected 50 basis points yesterday, sending the lira down as much as 0.9 percent against the dollar.

Turkey’s debt as a percentage of gross domestic product has fallen 10 percentage points since 2009 to 36 percent, Moody’s said.

The Moody’s decision could trigger Turkey’s inclusion in investment-grade indexes, Christian Keller, an analyst at Barclays Capital in London, wrote in an e-mailed note. “The current global liquidity environment and index-related implications are more likely to continue to support inflows into hard and local currency bonds.”

Turkey received its first investment-grade rating in 18 years from Fitch on Nov. 5. Standard & Poor’s ranks the country BB+, one level below investment grade. S&P will hold a meeting in Turkey on June 4, according to a statement on the rating company’s website.

Five-year credit-default swaps fell six basis points to 114, dropping more than half from a year ago. The nation’s risk premium is now on par with Brazil and Israel, and lower than South Africa, Russia or Hungary.

Obama Visit

The announcement coincided with Prime Minister Recep Tayyip Erdogan’s visit to Washington to meet President Barack Obama and promote trade and investment in Turkey. Erdogan brought a delegation of business leaders to the U.S. capital, where he also addressed the U.S. Chamber of Commerce, the nation’s largest business lobbying group.

The move puts Turkey’s credit rating at the same level as Spain, Colombia and India. At 4.64 percent, yields on Turkey’s dollar-denominated bonds due in 2041 are 31 basis points higher than similar-maturity Colombian securities, according to data compiled by Bloomberg. The gap has narrowed from as high as 205 basis points in January 2012.

Turkey should prepare for appreciation in the lira after the Moody’s decision, Economy Minister Zafer Caglayan said in an e-mailed statement. The move will cut foreign borrowing costs for the government and boost financing options for companies, Caglayan said.

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