ISTANBUL: Turkish assets were buoyant on Monday, with the benchmark bond yield holding firm ahead of two debt auctions, the lira close to three-month highs against the dollar and stocks hitting a new 18-month peak.
Amid strong demand for Turkish assets following benign July inflation data, the treasury will tap a fixed-coupon bond maturing in March 2017 and an inflation-indexed bond due in February 2022 on Monday and hold two further auctions on Tuesday.
The country's sovereign two-year benchmark bond yield stood at 7.50 percent at 0830 GMT, virtually unchanged from a previous close at 7.49 percent, as traders awaited the auctions.
The benchmark yield has fallen around 45 basis points in two weeks.
"The positive sentiment in the bond market continues after the inflation figures. Easing funding conditions from the central bank also support the fall in yields," said Tufan Comert, strategist at Garanti Securities.
Consumer prices fell more than expected in July, data showed on Friday, supporting expectations that the central bank will cautiously ease policy in coming months as economic growth slows.
The central bank's average lira funding rate fell below 7 percent on Friday for the first time so far this year, allowing banks to buy more bonds as their funding costs fall. The rate stood at 10.8 percent in late May.
Istanbul's main share index rose 0.71 percent to 65,740 points on Monday, extending its rally after closing at a 1-1/2 year peak on Friday though it underperformed a 1.07 percent rise in the MSCI emerging markets index
Bank shares rose, helped by the fall in bond yields that cuts their funding costs.
The Treasury plans to borrow 16 billion lira ($9 billion) from the domestic markets in August compared with redemptions seen at 17.7 billion lira.
Monday's auctions might see less demand than Tuesday's debt sale, when the treasury reopens offers a 9-year fixed-coupon bond, with investors expected to the benchmark two-year bond and favour shorter maturities.
"(Monthly) inflation has been negative for three months. This could reduce the bids for the CPI linker. It can be low for the five-year tap too as investors would prefer to bid in Tuesday's taps as falling funding costs affect short-term bonds more positively," Comert said.
By 0807 GMT, the lira stood at 1.7788 versus the dollar , close to Friday's level of 1.7780, its strongest in three months. Against its euro-dollar basket, the currency stood at 1.9884, from 1.9864.
"The lira is strong due to the fall in inflation, the narrowing of the current account gap and the central bank's policies which support sustainability," said Pinar Uslu, strategist at ING's Affluent Banking unit.
"The lira may firm after the taps depending on the level of bids - 1.7650 is an important level for dollar-lira," Uslu said.
Turkish assets have enjoyed a strong run in 2012.
Dollar-based returns on Turkish stocks are over 30 percent so far in 2012, making it the best performing emerging equity market after Egypt. Local bonds have returned 17 percent in dollars, almost double the figure for the broader emerging markets index.
Some, but far from all, of the strong gains may be down to a bounce-back from a disastrous 2011, when Turkish equities fell 20 percent and the lira plunged 18 percent.
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