Turkish bonds climb on IMF expectations

The advance in benchmark lira bonds pushed the average yield down 13 basis points to 12.11 percent in Istanbul, the most since the week ending April 10, according to an index of securities tracked by ABN Amro Holding.

IMF First Deputy Managing Director John Lipsky said after meeting Deputy Prime Minister Ali Babacan Friday that the two sides "had a very productive discussion" and would continue their meetings. The Central Bank cut its key interest rate on June 16 to 8.75 percent to support the economy, which shrank 6.2 percent in the fourth quarter.

"The possibility of an IMF deal is seen higher after Friday’s meeting because the statements on talks continuing on a technical basis and the convergence of views," said Barbaros Özüyılmaz, who helps manage the equivalent of $1.1 billion of Turkish assets at Alternatifbank in Istanbul. "The market is buying the possibility of a loan accord."

The two sides "had a productive discussion ... and found there is a great convergence of views about the near and medium-term challenges facing Turkey,"

Lipsky said after meeting Babacan in the southern resort of Bodrum. Talks will continue in the capital Ankara and in Washington, Babacan told reporters.

Bond yields have fallen from a high of 25.01 percent in October as the Central Bank slashed its main rate by 8 percentage points in eight months to cushion the economy from its first recession since 2001, ABN Amro’s index shows.

Turkey and the IMF have been talking about a possible new loan program of between $20 billion and $40 billion for more than a year. Progress has stalled since the IMF’s last visit to the country in January amid disagreement over the government’s spending plans and IMF demands to make the tax-collection agency more independent. Timothy Ash, head of emerging-market economics at Royal Bank of Scotland Group, wrote in a note Friday after meeting Turkish Treasury and Central Bank officials that he "did not get the sense that an IMF deal is close to being concluded."

Ash said he is "positive" on bonds and the lira, given "limited inflationary pressures" and the Central Bank’s willingness to cut rates further, "at least by another 75 basis points."