Turkish Bonds Fall as Weak Currency Dents Rate-Cut Expectations

Turkish bonds fell, sending two-year yields to a three-week high, as investors pared bets for an interest-rate cut next week after escalating violence in neighboring Iraq damped demand for the country’s assets.

Yields on the benchmark notes increased 21 basis points to 8.63 percent, the highest since May 28 on a closing basis. The lira declined 0.2 percent, extending its depreciation in the past two weeks to 3.3 percent, the worst performance among 14 currencies in emerging Europe.

Bonds have tumbled and the lira weakened this month as Islamist militants took Turkish diplomats hostage and drove energy prices higher as they seized parts of Iraq. The two-year yield has jumped to within five points of the level on May 22, when the central bank unexpectedly cut its benchmark rate.

“The expectation is that the central bank will scale back its rate cut as the lira weakens against dollar,” Murat Yardimci, head of trading at ING Bank AS said in e-mailed comments. “And this is hurting the sentiment.”

Turkey’s policy makers will probably reduce their one-week repo rate by 50 basis points at its meeting on June 24, according to the median estimate of 21 analysts on Bloomberg. Central bank Governor Erdem Basci said this week the central bank may reduce rates between 25 and 75 basis points.

U.S. President Barack Obama said he’s dispatching as many as 300 military advisers to help the Iraqi army battle an insurgency, and the U.S. is prepared to take additional “targeted” action if necessary.

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