Suzanne Plunkett/Bloomberg News

Turkey Bond Weekly Slide Shows Growing Pressure for Higher Rates

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Turkish bonds fell, pushing two-year yields to the highest in more than a year, amid speculation higher borrowing costs will be needed to shore up the lira.

The yield on two-year government notes was 11.13 percent at 5 p.m. in Istanbul, following a 95 basis-point spike during the week to the highest level since March 2014. The lira ended little changed at 2.9149 after dropping 2.9 percent this week. It marked the fifth week of losses, the longest stretch since January.

Pressure is mounting on the central bank to act to bolster the lira after the collapse of coalition talks last week sent the currency to record lows for six consecutive days. The selloff worsened Tuesday when policymakers kept interest rates on hold for a sixth month and the next day signaled they may not raise borrowing costs before the Federal Reserve.

“Now that the currency is under attack, speculation of an emergency move by the central bank has emerged,” Evren Kirikoglu, a fixed income strategist at Akbank TAS in Istanbul, said by e-mail. “That’s why repricing is taking place now in all sectors of the curve.”

The lira has weakened 20 percent this year, the third-worst performer in emerging markets amid the political deadlock and intensified violence by Kurdish, Islamic and leftist militants that reached the capital, Istanbul.

President Recep Tayyip Erdogan could call for a new vote on Sunday, immediately after the legal 45-day period to form a coalition government expires. “God willing, we’ll have an early election on November 1st,” Erdogan told reporters in Istanbul.

Election Turbulence

While Turkish policy makers kept borrowing costs on hold since February, they’ve pushed the weighted-average cost of central bank funding up more than 100 basis points from a low in March to 8.76 percent as of yesterday by limiting the supply of liras.

The bank decided to implement a tighter liquidity policy for as long as necessary, it said in a statement accompanying its rates decision this week. The monetary policy committee is due to next meet on Sept. 22.

“Political uncertainty, security concerns and expected turbulence, which is to come with the new election, may force the central bank to make an extraordinary meeting much before the next scheduled monetary policy committee meeting and announce an outright rate policy rate hike,” Ozlem Derici, an economist at Deniz Investment in Istanbul, wrote in an e-mailed report.