September 26, 2012 / 3:41 PM / 5 years ago

UPDATE 1-Turkish markets weaken due to flight from risk

* Lira eases as investors focus on Europe’s challenges

* Attention turns to inflation data

* Shares drop 1.67 percent (Adds markets weaken, quote, closing prices)

ISTANBUL, Sept 26 (Reuters) - Turkish bonds weakened on Wednesday as domestic inflation concerns and flight from risk due to worries about Spain and the euro zone debt crisis outweighed the positive impact of successful debt auctions a day earlier.

The yield on Turkey’s two-year new benchmark bond rose to 7.6 percent on Wednesday afternoon from 7.49 percent early in the day and compared with a close of 7.52 percent on Tuesday.

“The yield curve generally is rising with the flight from risk as borrowing costs in Europe have risen significantly. The impact on the lira is less,” said a bond trader at one bank.

The trader said expectations of a short-term inflation rise due to tax hikes was also exerting downward pressure on the market, while Tuesday’s bond auctions were a positive factor.

The Treasury sold 3.65 billion lira ($2.04 billion) of Sept. 24, 2014 benchmark bonds at a yield of 7.56 percent, below a forecast 7.60 percent in a Reuters poll of 10 banks.

Including sales to public institutions, Turkey’s total borrowing amounted to 7.9 billion lira in September, exceeding the government’s target of 7.4 billion lira.

The market was now shifting focus to September inflation data due on Oct. 3, analysts said.

“I do not see a distinct drop (in yields) in the bond market while it is waiting for inflation data ... unless there is an increase in risk appetite,” said Pinar Uslu, a strategist at ING Bank.

“For the benchmark bond yield, on the downside 7.35 percent could be a strong level,” she said.

The Turkish central bank said on Tuesday that the recent decline in inflation may come to a halt in September, but that a gradual fall in core inflation was expected to continue.

By 1456 GMT the lira was at 1.7930 against the dollar , easing from 1.7890 late on Tuesday. Against its euro-dollar basket, it strengthened to 2.0475 from 2.0548 a day earlier.

The lira and shares were hit by reduced appetite for riskier emerging market assets on renewed concerns about Spain’s and Greece’s finances.

Istanbul’s main share index fell 1.67 percent to 66,675.67 points, underperforming a 1.32 percent fall in the MSCI emerging markets index. ($1 = 1.7919 Turkish lira) (Reporting by Nevzat Devranoglu and Behiye Selin Taner; writing by Daren Butler and Seda Sezer; editing by Stephen Nisbet)

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