Bond Market Outlook: Impact of Monetary Policy and Policy Direction
Aa
Share
Fixed Income strategy
The CBT has maintained its purchases from the secondary market, still below 6% vs the limit set at 7% of total assets of the CBT weekly statement for 2023. However, reserving the option to make additional purchases in ‘the Monetary Policy and Liraization Strategy’ for this year, the CBT can easily change the level and maintain purchases, if it sees a need.
In addition, it actively uses security maintenance requirements for banks exceeding the quantity and price restrictions on loans set by the CBT (forcing them to buy LT (>4y) fixed rate government bonds) with an objective of strengthening the monetary transmission mechanism.
Yield curve (%)
Despite these purchases and security maintenance requirements, bond yields were under upward pressure ahead of the 14 May elections as market participants had priced a higher possibility of a scenario that saw a return to orthodox policies.
Following the first round of elections, however, TRY bond yields rapidly adjusted downwards as policy continuity would argue for low FX volatility, low yields to persist in the near-term.
In the aftermath of elections, signals implying a change in policy direction are likely to determine the bond market outlook.
In fact, following the runoff, we have seen bond yields moving up again on newsflow about the appointment of Mehmet Simsek, the former economy minister, and expectations about the macro policy. His role as Minister of Economy and Finance places him in charge of the economy again and markets are pricing in more orthodoxy in the policy ahead than anticipated earlier.
Real interest rate (%)
