Bloomberg News

Turkish Yields Rise Third Day on Tighter Liquidity, Rate Bets

October 21, 2011

Oct. 21 (Bloomberg) -- Turkish bond yields rose for a third day, after the central bank boosted overnight lending rates yesterday to stem lira declines and tackle inflation, prompting speculation there may be a rate increase.

Yields climbed 29 basis points, or 0.29 percentage point, to 9.43 percent at the 5 p.m. in Istanbul, closing at the highest level since May 2010. The lira strengthened for a second day after the central bank raised the overnight lending rate to 12.5 percent from 9 percent on Oct. 20, appreciating 1.2 percent to 1.8363 per dollar.

The lira has slumped 16 percent this year, making it the second-worst performing emerging currency tracked by Bloomberg as Turkey’s current-account deficit, inflation concerns and European debt worries dented investor confidence. To stem the lira’s slide, the central bank has sold more than $8 billion in daily auctions since Aug. 5, reducing its reserves to $85.9 billion as of Oct. 14. It sold $350 million today.

“It has been a true bloodbath in the rates market,” said Benoit Anne, head of emerging-market strategy at Societe Generale SA in London. “People are now aggressively betting on the central bank not being able to sustain its foreign exchange intervention,” and that it will eventually be forced to increase the benchmark interest rate, he said.

Governor Erdem Basci is battling to end the slump in the lira after cutting the benchmark rate by half a point to 5.75 percent on Aug. 4, concerned that the European debt crisis will undermine economic growth. The lira has fallen 5.2 percent against the dollar since, adding to a surge in prices from the government’s tax increases on cigarettes, alcoholic drinks, motor vehicles and mobile phones.

‘Tightening Bias’

The central bank’s decision yesterday to raise the overnight lending rate introduces “some tightening bias,” Basci said at a panel in Warsaw today.

The current account deficit has widened to about 10 percent of economic output as imports outpaced exports amid an economic boom. The central bank predicts that the deficit has peaked and will decline next year. The economy expanded an annual 8.8 percent in the second quarter.

Two-year cross-currency swaps, the cost to exchange lira payments for dollar payments in the next two years, climbed for a seventh day in its longest rising streak in three years to the highest level since Aug. 1. After the central bank raised overnight lending rates yesterday, the swaps showed the biggest daily gain since at least 2005, when Bloomberg started tracking the data.

“The central bank cut interest rates too early under pressure from the government and created unnecessary volatility in the lira and bonds,” Bulent Topbas, a fund manager at Strateji Menkul Degerler AS, said in e-mailed comments.

--Editors: Wojciech Moskwa, Linda Shen

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at mbentley3@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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