Bloomberg News

Turkey Yields Sink to Lowest in 9 Months as Economy Contracts

July 04, 2012

Turkish bond yields dropped for a seventh day to the lowest level in nine months after a surprise first-quarter contraction in the economy spurred expectations of an interest rate cut.

Yields on two-year benchmark debt declined 14 basis points to 8.17 percent at the close in Istanbul, the weakest level since Sept. 21. The lira depreciated for the first time in four days, down 0.6 percent to 1.8070 per dollar, paring this year’s gain to 4.6 percent.

Turkey’s economy contracted 0.4 percent, the statistics office said yesterday, correcting data that showed 0.2 percent growth. The decline is the first since gross domestic product shrunk 5.5 percent in the first quarter of 2009 and compares with a 0.4 percent expansion in the last three months of 2011. The figure, originally reported on July 2, was corrected after the bond market closed yesterday.

“The downward revision in GDP increased rate cut expectations,” Onur Bayol, a fixed-income and currency trader at Denizbank AS (DENIZ), said in e-mailed comments. “Foreign investors in particular are buying bonds of all maturities,” Batol added.

The statistics office also corrected annual seasonal and workday-adjusted growth for the quarter to 2.4 percent from 2.3 percent, according to the statement yesterday. Unadjusted first- quarter annual growth remained at 3.2 percent, the agency said in its statement.

Turkey’s capacity utilization slid to 74.6 percent in June from 76.7 percent a year earlier, according to a central bank report June 25, pointing to increasing output gap in the economy. Its inflation rate advanced to 8.9 percent in June from 8.3 percent in May, beating the median estimate of 9.5 percent from nine economists in a Bloomberg survey.

Rate Cut

“If growth performance continues to surprise, the central bank will see itself under great political pressure to ease,” Luis Costa, an emerging-market strategist at Citigroup Inc. in London, said in e-mailed comments today.

“The problem is how foreign exchange will react to a possible easing cycle now, I don’t think the lira would take that very well,” Costa said.

Turkey may also revise down unadjusted annual economic growth of 3.2 percent to 2.8 percent when it announces the second-quarter GDP on Sept. 10, Burcu Unuvar, an economist at Is Yatirim, Turkey’s biggest broker by trading volume, told Bloomberg after a news conference in Istanbul today.

To contact the reporters 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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