Turkish Markets Stabilize as Central Bank Measures Bear Fruit

  • Lira, bonds gain as funding costs rise to near five-year high
  • Currency volatility dips while forward implied yields climb

The Turkish central bank’s unorthodox efforts to support the lira are breathing life into the nation’s battered markets even as some investors remain concerned about the effectiveness of the policy maker’s approach.

The lira has bounced from a record low reached earlier this month as the central bank’s efforts to tighten liquidity through daily funding operations pushed up funding costs to an almost five-year high. The currency’s volatility has also been damped by foreign-exchange swap auctions, while the nation’s bonds have jumped.

The monetary authority is walking a tightrope between government pressure to keep interest rates low to support growth and criticism from analysts and investors for not raising them fast enough and instead focusing on liquidity management, which they say remains opaque and unpredictable. While the markets have far from recovered from a rout spurred by political risk, climbing U.S. yields and mounting inflationary pressures, the charts below show how central bank measures have achieved some stabilization, in the short term at least.

1. Currency

At about 3.7781 per dollar, the currency has climbed more than 4 percent from the record low reached earlier this month. A 2.4 percent rally on Monday has also left it on course for its first weekly gain since early December.

2. Volatility

The spread between historical and implied volatility on the lira, a gauge that pits expected price swings against actual moves, fell to the lowest since August, a sign of reduced concern about future turmoil.

3. Bonds

The yield on Turkey’s 10-year bonds has dropped by almost 100 basis points from a record high of 11.94 percent this month.

4. Swaps

The implied yield on the currency has climbed to near 11 percent, increasing the lira’s carry return while making it costlier for investors to short the currency.


To some analysts, the relief in the lira has more to do with the pause in the dollar rally than the central bank’s policies. The pullback in the U.S. currency “came just at an opportune time to bail CBT out of what could have turned into a nasty situation,” Commerzbank AG economist Tatha Ghose wrote in an e-mailed note on Wednesday.

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