Turkey's inverted yield curve reflects expectations of rate tightening

With USD/TRY rising to 3.06 during trading yesterday and bond yields rising sharply alongside, the lira's woes are continuing this week. The shorter durations, for example, the 2-year yield, rose sharply by 22bps, while 5-year and 10-year yields also rose, but by less.

"The inverted yield curve suggests that pressure on the lira is making the market expect higher interest rates by the central bank (CBT) before long. A 150bps higher benchmark rate is forecasted by year-end. Unfortunately for policymakers, monetary tightening will have to come on the back of an already weak economy", says Commerzbank. 

Yesterday's data showed pronounced slippage in business sentiment in September, with real sector confidence dropping to its lowest since 2012, and Turkey's PMI remains well below 50. For these reasons, the strong Q2 GDP growth rate of 3.8% yoy is not expected to have continued during H2 2015.

"Assuming CBT does raise rates during Q4, though, and assuming that the repeat election of 1 November manages to produce a working government, potential is seen for a 5%-6% relief rally for the lira against the USD by year-end", added Commerzbank.