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Bond yields tumble after Turkey unveils latest credit tweaks

Money, Passport, Text Creative Commons
The government and central bank have ramped up measures to reverse the tumbling foreign-exchange rate, including placing restrictions on lending to firms with more than $1 million in foreign currency cash
  • New measures tighten control over credit and bond markets
  • Lenders to maintain up to 90% bonds for some corporate credits
  • Limiting of loan growth to 10% for some corporates will slow lending

Turkish benchmark bond yields fell by around 300 basis points on Monday after the central bank adopted its latest regulations meant to boost certain types of corporate credit in the face of months of rising lending rates.

On Saturday, the central bank unveiled new required bond holdings for lenders, boosting demand on Monday.

The measures are meant to address the widening gap between the bank’s policy rate and lending rates, days after it shocked markets with a 100 basis-point interest rate cut to 13 percent.

The two-year benchmark bond yield tumbled some 360 basis points after the announcement, which required lenders to hold bonds for corporate loans extended at certain coefficients above the central bank’s reference rate of 16.32 percent.

The 10-year benchmark bond yield fell to 14.19 percent from 16.93 percent at Friday’s close, while the two-year benchmark fell to 14.02 percent from 17.62 percent.

“The new measures tightened the central bank’s control over credit and bond markets,” a senior banker told Reuters. “The banks need to buy and hold more bonds if they don’t lend money according to government plans.”

Turkey’s lira stood at 18.1205 to the dollar as of 0835 GMT, slightly weaker than Friday’s close of 18.085. It has lost 27 percent so far this year, and shed 44 percent last year, largely due to unorthodox monetary easing in the face of 80 percent inflation.

The central bank, which has turned to macro-prudential policies to manage credit, replaced a reserve requirement ratio of 20 percent cash for credits with 30 percent bond collateral.

It also mandated lenders to maintain up to 90 percent bonds for some corporate credits according to the level of interest rates, effectively discouraging banks to lend with high rates.

Excluding rates for net-exporters that are favoured by the government’s economic programme, corporate credit rates were averaging around 40 percent before the measures were announced.

Bankers also say the central bank’s limiting of loan growth to 10 percent for some corporate loans will slow the lending market.

Turkish authorities have previously taken steps to limit loans to companies that are not net exporters as part of its effort to flip the big current account deficit to a surplus.