September 24, 2019 / 12:23 PM / 21 days ago

Turkey points to longer-term bond issues after rates fall, investors say

ANKARA, Sept 24 (Reuters) - Investors who met Turkish authorities this week said they expect the Treasury to start issuing longer-term bonds after recent sharp cuts in interest rates, and that further rate reductions by the central bank would be moderate.

The Treasury’s average cost of domestic lira borrowing with a fixed interest rate fell to 20.4% in July, according to the most recent data, after climbing to a high of 25.8% in April. Bankers estimate the current rate has fallen below 20%, along with declining inflation and more stable exchange rates.

The Treasury last issued a 10-year bond in July 2018. It has since preferred shorter-term bonds to limit the long-term impact of the cost of borrowing. Its average weighted maturity term fell to 28.9 months on average this year, from 71.4 months in January 2018.

“The Treasury and Finance Ministry will begin holding five- and 10-year bond auctions as of next year and it is therefore foreseen that foreign demand for government bonds will increase substantially,” one investor who attended the meetings said.

The investor, one of three who spoke to Reuters after the meetings, also said he got the impression that the Treasury may switch some short-term bonds issued in the first months of next year with longer-term debt.

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After raising its policy rate to 24% in September last year to stop a rise in inflation and put a floor under the ailing lira, the central bank has cut its policy rate by 750 basis points in total since July.

Another investor said the central bank’s messages during the meetings gave the impression that rate cuts were mostly over.

“We understand that they foresee more restrained adjustments with a focus on data ... regarding interest rates from now,” the investor said.

“We also understand from the central bank’s comments that they could lower their year-end (inflation) forecast, which is 13.9%, to 12 to 13%. Monetary policy is being shaped according to 8% inflation for next year.”

Turkey’s central bank did not comment when asked about the meetings.

The Treasury and Finance Ministry’s new three-year economic programme, which it announces every year, is expected to be based on 5% growth for next year, the investor said.

Two other investors who attended the meetings said they had got the impression that a new draft law that would increase the Treasury’s borrowing limit could be introduced in parliament after the programme is announced.

The Treasury and Finance Ministry did not comment. (Writing by Ali Kucukgocmen, editing by Larry King)

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