Türkiye’s credit default swap sees lowest in 6.5 months

Türkiye's five-year credit default swap (CDS) declined to 217 basis points, its lowest since Feb. 18, as expectations of easing tensions in the Middle East and the impact of liquidity management measures by the Turkish economic administration came to the fore.

The Middle East conflict continues to impact global economies, with emerging market risk premiums beginning to decline amid rising hopes of lasting peace in the region.

Washington is reportedly preparing to send back its diplomats to some of its embassies previously evacuated during the conflict with Iran, while countries mediating dialogue between the US and Tehran say negotiations could resume, fueling optimism and driving down risk perception in the region.

October-delivery Brent crude oil fell 3.9% to $88.60 a barrel on Tuesday, and the US 10-year Treasury yield dropped about seven basis points to 4.63% as concerns over energy supply eased, reducing inflation concerns.

Meanwhile, the Turkish Central Bank decided to resume one-week repo actions in an announcement on Aug. 23 after the auctions were suspended as of March 1.

The decision to resume came as part of the bank’s Turkish lira liquidity management framework.

The bank had suspended the auctions to limit the economic impact of heightened volatility after the US-Israel-Iran war broke out on Feb. 28. Banks’ liquidity needs were met through the 40% overnight lending rate during the suspension period.

The decision signaled that the bank had shifted to a tighter and more controlled funding strategy, but that period came to an end on Sunday, while the reinstatement of the weekly repo channel was deemed a sign of a return to normal.

Türkiye’s two-year bond yield fell below the 40% threshold for the first time since July 2, while a limited pullback was also seen in the long-term bond market.

Ozlem Derici Sengul, an economist and founding partner at Istanbul-based Spinn Consulting, told Anadolu that the most direct factor driving down the country’s five-year credit risk premium was the drop in bond yields.

Sengul stated that while there has yet to be a tangible improvement in inflation expectations, no major changes were observed in currency risk or other macroeconomic risks. The CBRT’s resumption of weekly repo actions did contribute to the drop in the CDS, but it has yet to be fully reflected in actual funding costs.

“Global conditions, falling oil prices, and a slight easing of the (Middle East) war situation are the main factors driving down the CDS,” she said. “The increased likelihood of a CBRT rate cut in the coming period has also been influential, and when considered together, the strengthening CBRT reserves are also contributing positively to the overall risk premium.”

Sengul warned that the sustainability of the CDS decline should be questioned as various risks could affect the positive trajectory, such as US sanctions against Iran. Türkiye could be affected by extreme sanctions as an importer of Iranian natural gas, while Washington’s plans to shut down financing channels into Iran could impact Türkiye as well.

She noted that the trend in inflation is also a major risk as recent data showed a deterioration in inflation estimates from households and the real sector.

“The Iran issue will play a role on a global scale, while the CBRT’s policies will impact domestic bonds — if we see this easing continue, we’ll know that it’s happening since the CDS declined simultaneously with bond yields,” she added.

Seda Yalcinkaya Ozer, investment finance strategy director at brokerage Yatirim Finansman, told Anadolu that the decline in Türkiye’s CDS has both a global and a domestic aspect.

Ozer stated that Washington is not directly targeting Chinese banks with its sanctions and that diplomatic expectations from the Iran-Pakistan-Oman talks reduced the risk premium of oil, with the US shifting to an economic strategy rather than direct military pressure against Tehran.

She noted that the risk of military conflict eased and the war premium retreated.

“The relative easing of the Middle East tensions and the decline in commodity prices fueled risk appetite, not only in Türkiye but across emerging markets as a whole; however, Iran’s potential retaliation due to the Strait of Hormuz could rapidly reverse current dynamics,” she said.

Ozer mentioned that while the decline in CDS is not by itself a sign that “all is well,” oil prices falling below $90 a barrel are positive in terms of Türkiye’s current account deficit, fuel prices, inflation, and the CBRT’s rate policy.

“The CBRT’s resumption of weekly repo auctions after a six-month suspension is critical, while the pullback of funding costs from the 40% overnight band towards the official policy rate of 37% is deemed as a step towards a rate cut possibility in September,” she said.

“The market is viewing this as a confirmation that the normalization is continuing alongside a gradual slowdown in inflation,” she added.