Treasury yields trim last week’s decline as Turkish currency fears loom over investors

U.S. government bonds yields rose Monday, taking back some of the previous week’s decline, as the continued swoon of Turkey’s lira prompted haven-related buying interest.

How are Treasurys trading?

The 10-year Treasury note yield TMUBMUSD10Y, -1.76% was up 1.8 basis points to 2.877%, after it slipped 7.6 basis points to 2.859% Friday, according to Dow Jones Market Data based on levels at 3 p.m. Eastern. Yields and prices move in opposite directions.

The 2-year note yield TMUBMUSD02Y, +0.15% rose 1.2 basis points to 2.612%, while the 30-year bond yield TMUBMUSD30Y, -0.89% added 2.7 basis points to 3.045%. Monday’s action comes after three maturities logged their largest daily yield decline since May 29 to end last week’s trade.

What’s driving Treasurys?

A selloff in the lira, as well as the broader spat between the U.S. and Turkey, roiled markets last week as investors piled into assets perceived as safe like Treasurys. Much of that selling began to abate on Monday but yields remained well below levels before tensions broke out.

Analysts say a Turkish currency crisis could have a wider impact as some European banks have large exposure to Turkish corporate borrowers, many of which receive their sales in lira but have large euro-denominated and dollar-denominated loans on their books. The lira’s weakness will thus hurt the ability of this group of debtors to service interest payments.

The Turkish lira USDTRY, -0.3210% reached fresh lows against the U.S. dollar Monday, down more than 7%, after tumbling 14% on Friday. The Nikkei 225 NIK, -1.98% fell shy of 2%, while the Hong Kong’s Hang Seng Index slipped 1.5%. The Stoxx Europe 600 SXXP, -0.25% ended the session less than 0.3% at 384.91.

On Friday, President Donald Trump said he would increase tariffs on steel and aluminum imports on Turkey, accelerating a decline for the Ankara’s monetary unit. Trump’s comments come after the U.S. already imposed sanctions on the country earlier in the month over the detention of American pastor Andrew Brunson. Over the weekend, Turkish President Recep Tayyip Erodgan hit back at U.S. tariffs and sanctions, saying “you cannot tame our people with threats,” during speeches at coastal cities near the Black Sea.

The Central Bank of the Republic of Turkey cut its reserve requirement ratio for domestic currency deposits with the intention to ease the liquidity strain on banks. But investors say a lack of willingness to push interest rates higher, which Erdogan considers the wrong path, has eroded the credibility of Turkey’s economic policy makers. During a currency crisis, central banks will often lift rates to combat a rapid currency decline to prevent capital from leaving the country.

Also check out: Turkey’s central bank fails to soothe investors

What did market participants say?

“With all this talk in geopolitical areas, the trade war and the Turkey crisis, it caught some people off guard and put a flight to quality bid into the market. Now you’re seeing some of [the sellers] come back,” said Sean Simko, head of global fixed income management at SEI Investments.

“Astoundingly, the [Turkish central bank] is yet to come out with a hike in its one week repo rate. At this stage, that in itself would not be enough to stem the rout in our view, but it would be a step in the right direction. President Erdogan was once [again] railing against the prospect of higher interest rates this weekend,” said Richard Briggs, senior analyst for emerging markets strategy at CreditSights, in a Monday research note. The so-called repo rate refers to the short-term lending rate that the central bank extends to commercial banks in Turkey.

How are other assets doing?

Bonds for so-called peripheral eurozone economies have come under pressure amid concerns their banking sectors may have exposure to strained Turkish borrowers. The yield for the 10-year Italian government bond TMBMKIT-10Y, +3.72%  jumped 11 basis points to 3.098%, while the 10-year yield for Spanish government bonds TMBMKES-10Y, +3.39%  advanced 4.5 basis points to 1.391%.

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