Turkey's borrowing costs hit record high as investors lose faith

Turkey's financial troubles deepened today as investors dumped its sovereign debt, pushing government borrowing costs to their highest on record.

The yield on a benchmark 10-year government bond yield broke above 20 per cent for the first time ever, after closing previous day at 18.9 per cent, according to Reuters data. Yields move inversely to prices.

Investors have taken fright from Turkish assets amid concerns over government intervention in monetary policy and a worrying dollar debt load, alongside a diplomatic spat with the US.

The falling value of the lira is expected to add to inflation problems in the fast-growing economy, with consumer prices rising by 15.85 per cent in the year to July, according to the Turkish Statistical Institute. However, investors have lost faith in the ability of the Central Bank of the Republic of Turkey (CBRT) to raise interest rates significantly in an effort to protect the currency.

The central bank's credibility has been undermined by its sluggish response, combined with repeated interventions by President Recep Tayyip Erdogan. The autocratic head of state has previously said he is opposed to higher rates, which would likely have a negative effect on economic growth.

The broad sell-off of Turkish assets also prevented the lira from moving away from record lows of 5.4222 to every US dollar hit on Monday. The Turkish lira gyrated today, The lira traded at 5.2583 to the dollar at the time of writing, after earlier falling as far as 5.3837.

Investors remain cautious with regards to Turkish assets.

"We retain our bearish outlook as the structural and political story has further deteriorated," said Steven Major, global head of fixed income research at HSBC. "A distinct lack of policy response from the CBRT in July, against the weakening Turkish lira and accelerating inflation, has added to the market’s concerns."

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