Turkish bond yields fall, lira recovers

Turkish bond yields fell further on Wednesday, a day after the central bank made a surprise 100-basis-point cut in one of its key interest rates, while the lira recovered swiftly from losses following the decision. Two-year bond yields fell by a further 12 basis points to 8.88 per cent after diving as much as 25 bps following the bank’s move to cut its overnight lending rate to 11.5 per cent and increase one-month lira funding by 1 billion to 6 billion lira. While the 5.75 per cent main policy rate remained on hold, the move signalled to markets that the bank was comfortable that gains for the lira this year and easing of its huge current account gap give it enough room to move to support a slowing economy. Most analysts moved forward their forecasts for rate cuts in response, saying the stronger lira and slower loan growth so far this year had reduced inflation pressures. “Although the narrowing of the interest rates corridor will not have a serious effect on the funding costs (for banks), yesterday’s measures signalled the next easing move will be faster than previously anticipated by the markets. And this supported bonds,” said Tufan Comert, a strategist at Garanti Securities. Inflation in Turkey is just over 10 per cent, almost twice the bank’s main rate, a reflection of the fact that the bank is managing monetary policy mainly through banking sector liquidity rather than simply through the benchmark interest rate. But the bank has repeatedly said it expects a gradual decline in prices to start from the second quarter of the year and economic growth -seen by the IMF at as little as 0.4 per cent compared to a government forecast of 4 per cent -is slowly becoming a bigger concern. Turkey’s 5-year CDS -the cost of insuring government bonds against default -fell 4 basis points to 245 points, the lowest since early December, according to data from Markit. The lira’s veering between sharp gains and losses over the past three years has been a key driver of policy in Turkey and whether it and other emerging currencies continue to appreciate steadily this year are likely to be crucial for further moves. Easing of monetary policy reduces the premium investors get for holding the currency and all things being equal should lead to a weaker exchange rate.