Turkish bond yields fall, c.bank sees inflation hitting target

ISTANBUL Tue Nov 27, 2012 11:29am EST

ISTANBUL Nov 27 (Reuters) - Turkish bond yields hit record lows on Tuesday on expectations of more rate cuts, further fuelled by a central bank forecast that inflation would drop to the bank's target level next year.

The lira was trading a touch stronger and shares were just above flat.

The yield on the two-year benchmark bond closed at 6.05 percent, after hitting an all-time low of 6 percent. It closed on Monday at 6.12 percent.

The central bank has indicated it could cut its overnight borrowing rate and the one-week repo rate - its main policy rate - to rein in the strengthening lira, having cut its overnight lending rate last week for the third consecutive month.

In an interview with Reuters in Helsinki on Tuesday, Ahmet Faruk Aysan, a member of the bank's rate-setting monetary policy committee, reiterated the possibility of a measured cut in the future.

Aysan also said inflation at end-2012 would likely be below the bank's latest forecast of 7.4 percent and that its target of five percent in 2013 was "definitely achievable".

Analysts said yields fell on prospects of lower inflation and an easier monetary policy outlook, which would cut lira funding costs for banks and allow them to buy more bonds.

By 1530 GMT, the lira was at 1.7925 to the dollar , slightly firmer than 1.7931 late on Monday. Against its euro-dollar basket it strengthened to 2.0544 from 2.0587.

Istanbul's main share index closed up 0.18 percent at 71,999 points, underperforming a 0.21 percent rise in the global emerging markets index.

Shares in Garanti Bank were down 0.95 percent at 8.30 lira after General Electric's Turkish subsidiary GE Arastirma ve Musavirlik applied to sell a 39 million lira ($22 million) stake in the bank.