Turkish Markets, Lira Firm Up, Yields At Year Low

Following a solid start on the first trading day of the week, Turkish currency and shares gained further on Tuesday, while the benchmark bond yield fell below 8 percent, its lowest in a year, as markets started to price in easing from the central bank in the coming period with a lower inflation outlook for next year.

The lira was firmer at 2.2232 by Tuesday afternoon from 2.2280 against the US dollar late on Monday, while the two-year government bond yield fell to 7.99 percent from 8.08 percent on Monday. Main share index Borsa İstanbul (BİST) was up 0.49 percent at 80,897 points, outperforming the broader MSCI emerging markets index, which was down 0.07 percent. The central bank said last month that elevated food prices are delaying the improvement in the inflation outlook, yet falling commodity prices, especially oil, are expected to support the disinflation foreseen for the next year.

"The market is preparing itself for a rate cut in the coming period from the central bank. It's not being priced in the lira yet, but short-term bonds are pricing in a 100-basis-point reduction in interest rates in the coming three to six months," said a banker.

The central bank will convene on Thursday for its monthly rate setting meeting, but economists forecast that high inflation will mean no change to interest rates this month. Turkey is struggling to control inflation that is well above the central bank's year-end target of 5 percent, while economic growth is faltering. Investors are also eyeing Standard & Poor's (S&P) credit note, due on Friday, with bankers saying that a positive surprise from the rating agency is seen as more likely than a negative one. S&P -- which rates Turkey at BB+ with a negative outlook -- is the only one of the three major rating firms that does not class Turkey as investment grade. S&P said last year it had failed to reach a deal to offer a full rating for Turkey and would only issue "unsolicited" assessments -- meaning it is not paid by Turkey to provide coverage but does so anyway to meet investor needs. Turkey is rated Baa3 by Moody's and BBB- by Fitch.

Markets also eyed treasury debt auctions on Tuesday, when the treasury started selling a new two-year benchmark bond. It has also launched a $1 billion 10-year sukuk (Islamic bonds that do not pay interest) at fixed rates over mid-swaps. Demand for this sukuk issue reached around $3.4 billion. This is Turkey's third sukuk transaction, having issued Islamic bonds in both 2012 and 2013.

(Cihan/Today's Zaman)