Turkey's Central Bank Intends to Roll Over Debt Holdings

Turkey's central bank holds about TRY8 bln in domestic debt that expires next year and indicated it will buy about TRY8 bln of government paper to replace it. It will begin buying TRY100 mln in twice a week auctions beginning on Dec 23 and continuing through June. It will buy TRY5 bln through this process. It will be focused on the 1-5 year part of the curve. It did not specify how it would purchase the other TRY3 bln.

The TRY8 bln amounts to about 5% of the Turkish Treasury's planned borrowings for 2010. Looking at the maturity structure of the Turkish paper held by the central bank indicates that TRY5 bln will mature in May and of the remaining matures TRY1 bln in each of the months of July, Sept and Nov.

The central bank will be making its purchases before maturity and this may support the short-end of the Turkish curve, even though overall it should be market neutral. Another benefit of the central bank's tactics of stretching out the purchases is that it minimizes potential disruptions.

Separately, earlier today, Turkey reported its economic contraction in Q3 GDP contracted 3.3% year-over-year, after a revised 7.9% contraction in Q2 and a record 14.7% drop in Q1. The market was expecting closer to a 3.75-4.0% contraction in Q3. A quarterly figure was not readily available, but like many other countries, Turkish growth on a quarterly basis turned positive in Q2 (7.1% quarter-over-quarter)

The central bank meets next week. The base rate has been slashed to 6.5% which represents a cumulative cut of 10.25 percentage points over the past year. Inflation stood at a 5 month high in Nov of 5.5% . Although the central bank said last month that it retained its easing bias, the price pressures and some more encouraging news on the economy (industrial output rose 6.5% in Oct from a year ago, which is the first increase in more than a year) will likely keep the central bank on hold.

Like other countries, the combination of lower tax revenues and increased spending is producing a larger than expected budget deficit. The deficit this year is now expected to be near TRY60 bln, which is about 6 times larger than first anticipated.

Turkey does snot have a long-end bond benchmark, but some of the contagion from the region has clearly weighed on Turkish debt as well. Looking at the 2-year, the yield has risen 22 bp over the past five session, compared with 26 bp in Ireland, and 152 bp in Greece. Spain's 2-year yield has risen 9 bp and Italy 4 bp. At around 9.22% yield, Turkey's 2-year yield is among the highest in Europe.

We like the Turkish lira and expect it to appreciate against the dollar. The greenback has been turned back from nearly TRY1.5150 yesterday. A dollar upticks in North America today could see the it firm back to TRY1.5000-TRY1.5050 would it would be a low risk sale. Support for the dollar is found near TRY1.4775-TRY1.4800.