Yields rebound from 4-week lows as Turkey's US impact seen limited

NEW YORK: US Treasury yields recovered from four-week lows on Monday, with concerns about the global impact of the Turkish crisis easing somewhat after the country's central bank came out with measures to stabilize the plunging lira.

Some analysts said Turkey's crisis would have limited impact globally, especially on the United States, as US safe-haven assets are still well placed to benefit from any flare-up in global tensions.

"There are a host of idiosyncratic reasons in favor of concluding that the spill-over (from Turkey) should be minimal." said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

Turkey's central bank on Monday said it would provide liquidity and cut reserve requirements for Turkish banks, pushing the lira off record lows. That has partly improved sentiment overall, analysts said.

The lira, though, has lost more than 40 percent against the dollar this year amid worries about President Tayyip Erdogan's influence over the economy, his repeated calls for lower interest rates, and deteriorating relations with the United States.

"You're starting to see a little bit more of a modest reduction of concerns on that front for US markets," said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.  In afternoon trading, US 10-year yields rose to 2.878 percent from 2.859 percent late on Friday. Earlier, 10-year yields hit a four-week low of 2.848 percent.

US 30-year yields were also up, at 3.047 percent from Friday's 3.017 percent, after earlier dipping to a four-week trough of 3.011 percent.

On the front end of the curve, US 2-year yields inched up to 2.612 percent, from 2.60 percent on Friday.

Societe Generale's Rajappa stressed that US economic fundamentals remained strong and the Federal Reserve was on track to raise interest rates in September even with Turkey in the background. That should outweigh concerns about Turkey's impact.

Action Economics said in a blog though that deferred contracts are reflecting closer to a 50-50 bet for a fourth tightening this year at the December Fed policy meeting, compared with a 65 percent chance a week ago.

The research firm continues to forecast two more rate increases this year at the September and December meetings based on projections of solid economic growth and inflation holding at or just above the 2 percent target.

Action Economics added, however, that the Fed's normalization path will keep the pressure on Turkey.