Turkish bonds slumped, driving yields up the most in more than a week, as a weaker lira spurred bets of higher inflation and the European Central Bank suspended lending to some Greek banks.
The yield on benchmark two-year debt rose seven basis points, or 0.07 percentage point, to 9.60 percent at the close in Istanbul, the biggest jump since May 8. The lira depreciated as much as 0.3 percent in intraday trading before paring its loss to little changed at 1.8246 per dollar.
Turkish inflation advanced to 11.1 percent last month, the highest rate in 3 ½ years, compared with 4.3 percent a year earlier. Central bank Governor Erdem Basci says the rate of price increases will fall to 6.5 percent by the end of the 2012, helping to lower borrowing costs. The ECB said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Draghi signaled the ECB won’t compromise on key principles to keep Greece in the euro area.
“The weakening risk appetite abroad and rising exchange rates are reinforcing higher inflation expectations,” Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi AS (TEBNK) in Istanbul, said in e-mailed comments.
The central bank in Turkey continues to keep liquidity tight at its lowest funding rate, offering 2 billion liras ($1.01 billion) for a third day in its one-week repurchase agreement auctions, compared with the 1 billion-lira minimum and 6 billion-lira maximum it can lend. The bank varies the lending rate daily, keeping borrowing costs within a 5.75 percent to 11.5 percent interest-rate corridor introduced last year.
HSBC Bank Plc it exited its short dollar, long lira trade initiated on March 22 as Greece’s political and debt crisis deepened, the lender said. It opened the position at 1.81 with a target of 1.74, Murat Toprak, London-based head of the bank’s currency strategy for Europe, Middle East and Africa, said in an e-mailed note dated May 16. The lender closed the trade at 1.83 for a nominal loss of 1.1 percent.
The lira will probably to weaken to 1.91 per dollar by the end of the year, currency forwards showed.
“The fall in the lira is the result of general EM currency sell-off. The lira has been moving on a 1.80-1.83 band since the start of this week and the central bank is waiting for the storm to pass as this is a global movement,” Emre Balkeser, head of trading at Garanti Securities in Istanbul, said in e-mailed comments.
The Dollar Index added 0.1 percent, advancing for a record 14th day against a basket of currencies. The U.S. currency rose against the rand, ruble and Asian currencies such as the won and yuan.
U.S. and European stocks fell, dragging the Standard & Poor’s 500 Index to the lowest level since January, as investors speculated Spanish banks may have their credit ratings lowered and an American gauge of manufacturing trailed projections.
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