TURKEY: Borsa Istanbul Rallies to New Highs as 5-Year CDS Spreads Sink
Turkey’s 5-year CDS spreads – often cited by officials as a useful barometer of risk premium – have fallen to new cycle lows this week, down over 100bps from the April peak. More positive sentiment towards Turkish assets is most notably being reflected in local equity markets, with the Borsa Istanbul stock index at a new record high today – up 3% this week alone amid growing conviction for further interest rate cuts after the July CPI report extended a string of benign readings.
- While the Borsa Istanbul index has gained 14% this year, in dollar terms it is down around 1% as the lira remains the second-worst performing EM currency in spot terms vs. USD on a YTD basis. But the calmer political landscape since the arrest of Istanbul Mayor Imamoglu, the re-accumulation of FX reserves and recent ratings upgrades from the major agencies may point to a more gradual pace of TRY depreciation moving forward.
- The improvement in Turkey's external balance will also contribute towards a more predictable and less destabilising period of lira weakness. The current account deficit is projected at 1.5% of GDP this year compared to the 2% projected as per the September 2024 medium-term forecast. Meanwhile, the overall impact of US tariffs on the Turkish economy is expected to be subdued given that the US accounts for only 5–6% of exports.
- Overall, the central bank’s balancing act between supporting growth and maintaining credibility will determine whether the lira’s gradual weakening path remains intact, but for now the outlook for investors continues to show signs of improvement.
Figure 1: Turkey 5-year CDS spreads
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BONDS: 10-year Gilt/Bund Spread Tests 200bps Following UK Fiscal Data
The 10-year Gilt/Bund spread has widened 1.5bps today, piercing the 200bp handle for the first time in a month. This morning’s higher-than-expected UK PSNB print is driving the relative underperformance for Gilts.
- Broader core FI yields are facing some upward pressure today, following yesterday’s notable curve bull flattening. Gilt yields are 1.5-3bps higher, while German yields are up 0.5-1.5bps. Both curves have bear steepened on the session.
- Gilt futures are -17 ticks at 91.61, off session lows of 91.46. A bear cycle in Gilt futures remains in play, with initial resistance the 20-day EMA at 91.97. Bund futures are -11 at 130.34, still above the 50-day EMA which was pierced yesterday. A clear break of the EMA would undermine the recent bear theme and highlight a possible reversal.
- 10-year EGB spreads to Bunds are up to 1bp wider, with European equity futures down 0.6% today.
- BOE Governor Bailey is currently speaking to the Treasury Select Committee on the latest Financial Stability Report. Any references to UK inflation or the jobs market will be watched carefully.
- The GBP20.7bln UK PSNB figure for June was GBP6.6bln more than the year prior. The OBR projected a reading of GBP17.1bln, with BBG consensus standing at GBP17.5bln.
- In the Eurozone, the ECB’s Q2 Bank Lending Survey felt supportive of market expectations for one more 25bp cut this cycle - but does not signal a need to rush back into sequential rate cuts following a likely pause at Thursday's decision.
- This morning’s 1.125% Sep-35 Gilt Linker auction was strong (as expected), while German Green Bund supply was digested smoothly.
- Broader focus remains on Thursday’s flash PMIs and the ECB decision.
GERMAN AUCTION RESULTS: Green Bund Results
| 2.30% Feb-33 Green Bund | 2.50% Feb-35 Green Bund | |
| ISIN | DE000BU3Z005 | DE000BU3Z047 |
| Total sold | E500mln | E1bln |
| Allotted | E422mln | E931mln |
| Previous | E495mln | E2.386bln |
| Avg yield | 2.39% | 2.58% |
| Previous | 2.37% | 2.62% |
| Bid-to-offer | 3.01x | 1.92x |
| Previous | 3.49x | 1.05x |
| Bid-to-cover | 3.57x | 2.07x |
| Previous | 3.53x | 1.32x |
| Avg Price | 99.35 | 99.34 |
| Low Price | 99.35 | 99.34 |
| Pre-auction mid | 99.298 | 99.294 |
| Prev avg price | 99.53 | 98.98 |
| Prev low price | 99.52 | 98.96 |
| Prev mid-price | 99.478 | |
| Previous date | 17-Jun-25 | 08-Apr-25 |
BOE: Bailey Sees UK Experience With Steeper Curve Part of Global Phenomenon
Bailey speaking on global curves and the UK experience:
- "BANK OF ENGLAND'S BAILEY: WE HAVE SEEN STEEPER YIELD CURVES, THAT IS GLOBAL PHENOMENON" - Reuters
- UK EXPERIENCE IS NOT OUT OF LINE WITH OTHER MARKETS
- CAUSE OF STEEPER YIELD CURVE REFLECTS GREATER UNCERTAINTY ON TRADE POLICY"
He's speaking in front of lawmakers on the BoE's financial stability report - unlikely to get much on monetary policy specifically - but any references to UK inflation or the jobs market will be watched carefully. Livestream here: https://www.parliamentlive.tv/Event/Index/e1eb2a6b-6c37-43d3-a69b-566e1b7a84ab
