Bloomberg News

Turkey 2-Year Swaps Rise to Highest Since 2009 Over 10-Year

December 09, 2011

(Updates with Morgan Stanley comment in seventh paragraph.)

Dec. 8 (Bloomberg) -- The cost of two-year interest-rate swaps in Turkey rose to the highest level above 10-year contracts since 2009 after stronger industrial production and steeper inflation forecasts spurred bets of tighter monetary policy.

The two-year swap rates, which overtook 10-year counterparts for the first time on Oct. 27, are 66 basis points higher today, the biggest spread since March 2009. The central bank said yesterday it expects inflation to rise within 12 months to 7.15 percent from its estimate of 6.99 percent two weeks ago.

“Two-year swaps are rising more than the 10-year because the market is betting on tightening. Our expectation is for 50 basis points over the next three months,” Guillaume Tresca, a strategist at Credit Agricole SA in Paris, said in e-mailed comments.

Turkey’s Gross Domestic Product rose 7.3 percent from October 2010, the government statistics agency said on its website today. The median forecast was 5 percent in a Bloomberg survey of seven economists.

“Today’s industrial production data possibly caused the rise in two-year swaps and widening spreads,” Inan Demir, chief economist at Finansbank AS, said in e-mailed comments.

Short-Term Rates

The central bank cut interest rates in August as part of a plan to narrow Turkey’s record current-account deficit and deter short-term capital inflows. The lira has fallen 16 percent against the dollar this year, the second worst-performer among major emerging-market currencies. The drop forced the bank to double borrowing costs on Oct. 26, in an effort to slow loan growth under a dual interest rate policy.

The policy of lending at overnight rates as high as 12.5 percent rather than the 5.75 percent one-week repo rate “pushes short-term rates up very high, but no one expects these high rates to remain in place forever, which is why long-term interest rates are below short-term,” James Lord, London-based emerging-market strategist at Morgan Stanley, said in e-mailed comments. “Morgan Stanley expects the tight policy stance to remain in place for the near future.”

The central bank is likely to hold its benchmark one-week interest rates at 5.75 percent in 2012, the median estimate of five economists surveyed by Bloomberg showed.

--Editors: Ash Kumar, Peter Branton

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

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


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