Strong demand for Turkish bonds reduces government borrowing

The auction on Tuesday came as the Treasury continued with plans to pay back 40.4 billion Turkish liras ($19 billion) of domestic debt for the period from August to October 2014. The Treasury raised 4.2 billion Turkish liras (US$1.98 billion) in the two auctions on Monday. In two days, the Treasury sold a total net 7.9 billion liras ($3.7 billion) of August 2014 bonds at an average yield of 9.15 percent in the auction. The 10-year, semi-annual bond, which is expected to realise a yield of 4.50 per cent, was more than three times oversubscribed – attracting an overall book of 3.579 billion Turkish lira. The two-year, semi-annual bond, which is expected to realise a yield of 4.10 percent, was more than six times oversubscribed - attracting an overall book of 5.14 billion Turkish lira. The Treasury said in a statement on July 31 that domestic borrowing for the same period last year was 29.5 billion Turkish liras ($14 billion). On 29 January this year, the Central Bank of Turkey introduced drastic interest rate rises in response to the rise of the U.S. dollar against the lira in mid-January. Bank Governor, Erdem Basci, insisted the bank would only reduce interest rates when it is convinced the outlook for inflation improves.

However, despite annual inflation hovering at almost double its medium-term target, the bank cut the benchmark interest rate for three consecutive months to 8.25 percent on July 17, in an attempt to boost economic growth. Inflation in Turkey rose slightly last month, from 9.16 percent in June to 9.32 percent, mainly because of shock increase in food prices, according to the country's statistical authority.