Bloomberg News

Turkey Bond Yields Head to Lowest in 8 Months on Moody’s Upgrade

June 20, 2012

Turkish bond yields headed to their lowest in more than eight months and the lira rose against the dollar after Moody’s upgraded the country’s credit rating to Ba1, one level below investment grade.

Benchmark two-year yields plunged 13 basis points, or 0.13 percentage point, to 8.96 percent at 9:45 a.m. in Istanbul, on course for their weakest level since October. Yields on the 10- year dropped 11 basis points to 8.75 percent, poised for the lowest since January 2011. The lira strengthened 0.5 percent to 1.7926 per dollar, up for the seventh straight day in the longest streak of gains since October.

The upgrade had “two main drivers: the significant improvement that we’ve observed in Turkey’s public finances and our observation that the government has improved its shock absorption capacity,” Moody’s analyst Sarah Carlson said in a telephone interview from London after the ratings action today. “Upgrade to investment grade will probably be dependent on the sovereign becoming more resilient to balance of payment shocks,” Carlson said.

Turkey’s two-year bond yields have dropped 206 basis points this year as central bank Governor Erdem Basci tightened monetary policy to support the lira and slow bank lending that contributed to a surge in imports last year, which resulted in an expansion of the current-account deficit. Inflation fell to 8.3 percent in May from 11.1 percent in April, the biggest drop since January 2003. On May 31, Trade deficit for April narrowed more than expected, contracting for a sixth month, and the current-account gap retreated in April for a sixth month.

Budget Deficit

Prime Minister Recep Tayyip Erdogan ’s government has cut the budget deficit to 1.4 percent of gross domestic product and state debt to 39 percent, the lowest in Europe after the Czech Republic, Russia and Sweden. The government targets a shortfall of 1.5 percent of GDP this year.

With the upgrade, Moody’s joins Fitch Ratings at placing Turkey one level below investment grade. Standard & Poor’s rates the country two levels below. Fitch has a stable rating outlook for Turkey, while S&P cut its outlook on Turkey’s debt to stable from positive on May 1.

The upgrade today “is a major positive not only for the credit story but for all Turkish assets,” Simon Quijano-Evans, the head of emerging market research for Europe, the Middle East and Africa at ING Groep NV in London, said in an e-mailed report. “It also underlines the ratings convergence story that will continue between western and eastern Europe, especially given the much better fiscal dynamics of the latter, with Turkey probably the best-placed of all.”

Turkey’s central bank provided funding at its minimum policy rate for a 12th day, reducing borrowing costs for lenders. It has been lending at its lowest funding rate of 5.75 percent every day since June 5. It offered to lend 3 billion liras ($1.7 billion) today in its daily repurchase agreements auction at the minimum rate.

To contact the reporter on this story: Benjamin Harvey in Istanbul at

To contact the editor responsible for this story: Gavin Serkin at

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