Turkey Yields Retreat as Central Bank Adds Funds; Lira Weakens

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Turkish benchmark bond yields fell for a second day as the central bank provided more funding at its lowest lending rate. The lira depreciated after dollar sales were cut to $50 million.

Yields on two-year lira notes dropped 36 basis points to 7.34 percent at 5:02 p.m. in Istanbul, the lowest level since June 19, after surging 182 basis points last month amid the biggest anti-government protests in more than a decade. The lira traded 0.2 percent weaker at 1.9287 per dollar.

The central bank provided 5 billion liras ($2.6 billion) to lenders at 4.5 percent at its one-week repo auction, 500 million liras more than last week. That lowered the weighted average cost of funding for a sixth day to 4.98 percent. The bank reduced the amount it sells in auctions to a minimum $50 million from $150 million as of today after the lira touched its strongest in almost two weeks this morning. Today’s sale was at an average price of 1.9233, while bids totaled $73 million.

“The market had been squeezed in terms of liquidity for a long time,” Sercan Kiliclar, a fixed-income trader at Akbank TAS in Istanbul, wrote in e-mailed comments. The change in the quantity of the central bank funding and stabilization of the lira exchange rates is helping short-term local debt “to perform well,” he said.

The central bank resumed dollar sales last month for the first time since January 2012 and sold a total of $1.85 billion after anti-government protests and speculation about when the U.S. will curb stimulus sent the lira tumbling to a record 1.9602 against the dollar on June 24.

Extreme Reaction

Federal Reserve Chairman Ben S. Bernanke said in May policy makers could begin reducing the $85 billion of mortgage and Treasury bonds they buy each month should the U.S. economy continue to show sustained improvement. On June 19, he said stimulus may be curbed this year and end in 2014 if risks to the economy continue to abate.

The “Fed’s statement caused an extreme reaction in asset prices,” Bulent Topbas, a strategist at Strateji Menkul Degerler AS, said in e-mailed comments. “If the central bank is sending a signal for normalization, then they must have witnessed less stress in the markets.”

Foreign investors sold $132 million of Turkish bonds in the week ending June 21 in their fourth consecutive week of outflows, data from the central bank on June 27 showed.