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Türkiye’s 5-Year CDS Tumbles to Nearly 2.5-Year Low

Türkiye’s risk premium in international markets saw a significant fall in a recent period, testing approximately the lowest level in the last 2.5 years, Anadolu Agency (AA) reported Wednesday.

The country’s five-year credit default swap (CDS), which is one of the main indicators of risk premium, declined by 14 basis points to 364.64 a day earlier, AA said.

The CDS fell below 400 basis points earlier in November despite the ongoing geopolitical risks, as measures taken by the country’s new economy administration to ensure price stability are being gradually implemented.

Following employment data in the United States signaling a softening, expectations that the Federal Reserve (Fed) might be nearing the end of interest rate hikes gained strength due to the inflation in the country slowing more than anticipated.

After this data, the decrease in bond yields and the reduction in funding costs led to an increase in risk appetite in global markets. The 10-year U.S. Treasury yield fell by 19 basis points yesterday, closing the day at 4.44%, while the dollar index also showed its strongest decline in about a year, dropping by 1.5% to 104.05.

With the pricing in money markets, the possibility of interest rate increases in the coming period almost disappeared, and expectations that the Fed could start interest rate cuts in June strengthened.

With these developments, it was observed that credit risk premiums worldwide decreased. Accordingly, Türkiye’s five-year credit risk premium touched its lowest level since March 2021.

Analysts pointed out that the decline in Türkiye’s credit risk premium was influenced by the effective steps of the new economic administration in ensuring price stability. They also expressed that the measures taken in the fight against inflation slowly reduced uncertainties for the upcoming period.

However, analysts also stated that the simplification measures had an impact on the pricing of Turkish assets. Despite ongoing geopolitical risks in the Middle East, the decline in inflation worldwide and the expectation that major central banks could abandon hawkish policies exerted downward pressure on risk premiums.

The Central Bank of the Republic of Turkey (CBRT) increased the policy rate by a total of 2,650 basis points since June, while CBRT Governor Hafize Gaye Erkan stated in the November Inflation Report presentation that they expected the disinflation process to become effective from the second half of next year.

Treasury and Finance Mehmet Şimşek made an assessment regarding the decline in Türkiye’s credit risk premium (CDS) on his social media account on the X platform stating they expect results of implemented policies as of the second half of 2024 and onward.

“The results of the economic program we implement will be clearly seen from the second half of 2024 onward. Thus, investor confidence will further strengthen, and there will be an acceleration in global fund flows to our country,” he said.

“This will limit the downward risks on the short-term growth outlook of the disinflation program,” he added.

Source: Daily Sabah