Istanbul: Trkiye's five-year credit default swap (CDS) has decreased to 217 basis points, marking its lowest level since February 18. This decline is attributed to expectations of easing tensions in the Middle East and the impact of liquidity management measures implemented by the Turkish economic administration.
According to Anadolu Agency, the ongoing conflict in the Middle East has influenced global economies, with emerging market risk premiums starting to decline as hopes rise for lasting peace in the region. In an encouraging development, Washington is reportedly preparing to return its diplomats to embassies previously evacuated during the conflict with Iran. Countries mediating dialogue between the US and Tehran indicate that negotiations could resume, boosting optimism and reducing regional risk perceptions.
Brent crude oil for October delivery saw a decline of 3.9%, settling at $88.60 per barrel on Tuesday. Concurrently, the US 10-year Treasury yield decreased by approximately seven basis points to 4.63% as concerns over energy supply diminished, easing inflation worries. In response to these shifts, the Turkish Central Bank announced on August 23 that it would resume one-week repo actions, a decision framed within the bank's Turkish lira liquidity management strategy. This move followed the suspension of auctions on March 1, which aimed to mitigate economic impacts from heightened volatility following the US-Israel-Iran conflict.
The Turkish Central Bank's resumption of weekly repo actions signals a return to a more controlled funding strategy, ending the previous period of volatility management. As a result, Trkiye's two-year bond yield fell below the 40% threshold for the first time since July 2, with a limited pullback observed in the long-term bond market as well.
Economist Ozlem Derici Sengul, a founding partner at Spinn Consulting in Istanbul, highlighted that the drop in bond yields is a direct factor in reducing Trkiye's five-year credit risk premium. Sengul pointed out that while inflation expectations have not shown tangible improvement, no major changes have been observed in currency risk or other macroeconomic risks. Although the Central Bank's resumption of weekly repo actions contributed to the CDS decline, it has not yet been fully reflected in actual funding costs.
Sengul identified global conditions, falling oil prices, and a slight easing of Middle East tensions as key drivers behind the CDS decrease. She also noted the increased likelihood of a Central Bank rate cut in the near future, which, combined with strengthening Central Bank reserves, positively impacts the overall risk premium. However, she cautioned that the sustainability of the CDS decline should be questioned, given potential risks such as US sanctions against Iran and the trend in inflation.
Seda Yalcinkaya Ozer, investment finance strategy director at Yatirim Finansman, commented that the decline in Trkiye's CDS has both global and domestic dimensions. Ozer explained that Washington is not directly targeting Chinese banks with its sanctions, and diplomatic expectations from Iran-Pakistan-Oman talks have reduced the risk premium of oil, with the US shifting to an economic strategy instead of military pressure against Tehran. She noted that the risk of military conflict has eased, causing the war premium to retreat.
Ozer emphasized that while the decline in CDS is not an indication that "all is well," the drop in oil prices below $90 per barrel is favorable for Trkiye's current account deficit, fuel prices, inflation, and the Central Bank's rate policy. She stressed the importance of the Central Bank's resumption of weekly repo auctions after a six-month suspension, viewing it as a step towards a potential rate cut in September and a sign of ongoing normalization alongside a gradual slowdown in inflation.