Lira Rises as Turkey Yield Appeal Absorbs Shock of Rate Cut

(Bloomberg) -- Within 10 minutes of Turkey’s central bank decision, the lira reversed losses and advanced the most in emerging markets as traders coped with a record interest-rate cut by focusing on the currency’s yield appeal.

It rose as much as 0.9%, erasing an earlier knee-jerk reaction that sent it down more than 1% after the repo rate was lowered by 425 basis points, overshooting the median estimate in a Bloomberg survey of economists by 175-basis-points. The currency later gave back some of the gains, following a downturn in emerging-market currencies.

Even after today’s larger-than-expected reduction to borrowing costs, the lira boasts one of the highest implied returns in the world when adjusted for inflation. That, along with the prospect of monetary easing by the U.S. Federal Reserve and European Central Bank, is propping up the nation’s assets. Turkey’s average local-currency bond yields are 16%, the highest in Bloomberg Barclays’ emerging-market index after Argentina.

The lira’s drop was “short-lived” because its being supported by bond inflows, said Esther Law, a senior investment manager for emerging-markets debt at Amundi Asset Management in London. Turkey’s rate cut is “positive for short-dated Turkish bonds while the long end of the government curve will be more sensitive to future inflation data,” she said.

Many investors were worried that the central bank would unsettle the lira if it cuts rates too aggressively, especially after President Recep Tayyip Erdogan unexpectedly ousted the former central bank governor earlier this month, cementing his control of the institution. But the lira’s advance shows that risk appetite in global markets is buoyant.

The currency climbed 0.1% as of 2:10 p.m. in Istanbul to a session high of 5.7032 per dollar, the yield on two-year government bonds plummeted 71 basis points to 17.25%, while the Borsa Istanbul 100 Index fell 1.4%.

--With assistance from Selcuk Gokoluk, Aline Oyamada and Sydney Maki.

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, ;Onur Ant at oant@bloomberg.net, Robert Brand

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