Bloomberg News

Turkey Yields Fall to 8-Month Low on Funding Cost, Rate Cut Bets

June 27, 2012

Turkey bond yields fell to the lowest in more than eight months on bets of a rate cut this year and an upgrade in sovereign credit rating. The central bank extended funding at its minimum policy rate for an 18th consecutive day, lowering borrowing costs.

Yields on two-year benchmark debt slid for a second day, down 13 basis points, or 0.13 percentage point, to 8.65 percent at the close in Istanbul, the weakest level since Oct. 18.

Turkey’s inflation rate slipped to 8.3 percent last month from a three-year high of 11.1 percent as the central bank raised the average cost of funding to 9.8 percent in May from 8.3 percent in April. Oil slumped 28 percent from this year’s peak in February, helping the current-account deficit contract for a sixth month in April. Capacity utilization slid to 74.6 percent in June from 76.7 percent a year earlier, according to a central bank report June 25.

“We believe that the central bank will cut policy rates in the last quarter of the year with more favorable inflation conditions,” Bora Tamer Yilmaz, vice president at Halk Securities in Istanbul, said in an e-mailed note. Capacity utilization data shows the economy failed to gain momentum in the second quarter, he said.

The government expects economic growth to retreat to 4 percent this year from last year’s 8.5 percent, the fastest among major economies after China and Argentina. Two-year cross- currency swaps declined to 6.89 percent, the lowest level since Oct. 19 and down from 8.19 percent May 15, signaling traders are betting on a rate cut. Turkey meets almost all of its energy needs through imports.

Cheaper Borrowing Costs

The central bank lent 1 billion liras ($552.3 million) at 5.75 percent in its one-week repurchase agreements auction today. The provision of liquidity at the minimum funding rate for the 18th straight day is the longest stretch since March.

The bank executes its monetary policy through a rates corridor introduced in October. It adjusts borrowing costs between 5.75 percent and 11.5 percent daily to control credit growth and the current-account deficit while reining in inflation.

The benchmark bond yields have fallen 66 basis points in the second quarter, extending the decline in the previous three months.

“Bond yields are falling fast with the central bank increasing its funding and the cost of funding in the market falling,” Onur Bayol, an Istanbul-based fixed income and currency trader at Denizbank AS, said in e-mailed comments.

Ratings Upgrade Bets

Moody’s Investors Service upgraded Turkey’s credit rating to one level below investment grade June 20. The move to Ba1 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 from London after the ratings action.

“Expectations of an upgrade from a rating agency is supporting today’s purchases in the bond market in addition to expectations that inflation will fall in the next two months and we will close this year around 7,” Murat Yardimci, head of trading at ING Bank, in Istanbul said in e-mailed comments.

Fitch Ratings ranks Turkey at BB+, one step below investment grade with a stable outlook. Standard & Poor’s cut the outlook on Turkey’s debt to stable from positive on May 1, maintaining its BB rating, two steps below investment grade.

The lira depreciated 0.3 percent to 1.8128 per dollar, paring its loss in the second quarter to 1.7 percent, outperforming all the other emerging-market currencies in Europe, Africa and the Middle East after the Icelandic krona.

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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