The yield on Turkey's two-year benchmark bond fell to 7.18 percent in early trade although it was back up at 7.23 percent by 0900 GMT, the same level as Tuesday's close and its lowest since January 2011.
Traders said the market was starting to price in the possibility that the central bank could reduce its 5 percent overnight borrowing rate, the floor of its interest rate corridor, if global liquidity rises.
Investors already expect the bank to trim its overnight lending rate, the upper level of the corridor which is currently at 11.5 percent, at its next policy meeting on Sept. 18.
"Bond investors have started to buy bonds on prospects that the central bank could also cut the lower end of the interest rate corridor if the Federal Reserve announces a new quantitative easing program to boost its economy," said Suha Yaygin, an emerging markets trader at TD Securities.
"Such an abundance in global liquidity would help the bank to be more aggressive in its rate cuts."
The US Federal Reserve begins its two-day policy meeting on Wednesday, with markets widely expecting some type of new monetary stimulus for the sluggish US economy.
The yield on Turkey's two-year benchmark bond has fallen around 60 basis points since late August, when Central Bank Governor Erdem Basci hinted the rate-cutting process could start sooner than expected.
Turkish credit default swaps, the cost of insuring Turkish government debt against default, stood at 147 basis points (bps), 4 bps tighter than on Tuesday and the lowest since May 2011, according to Markit data.
The fall was partly due to declining inflation and a narrowing current account deficit, which supported expectations of a gradual slowing in the Turkish economy as domestic demand weakens after years of strong growth, said an analyst from a major bank in Istanbul.
Turkish inflation stood at 8.88 percent year-on-year in August, down from over 11 percent in April. Its current account deficit narrowed to $34.45 billion in the first seven months of the year, down 31 percent on a year earlier.
The lira firmed slightly against the dollar to 1.8000, but traded near to its three-month weakest level against its euro-dollar basket at 2.0593, from 2.0570 late on Tuesday.
"The rate cut expectations from the central bank are preventing the lira from strengthening further than the 1.80 level versus the dollar," said the treasury manager of a brokerage house in Istanbul.
Istanbul's main share index was up 0.15 percent at 68,206 points, underperforming a 0.66 percent rise in the MSCI emerging markets index.