ISTANBUL: The Turkish lira was stronger while bond yields steadied on Wednesday as the central bank continued to tighten lira liquidity through a costly intraday repo auction, a day after it adopted a more hawkish bias at its policy meeting.
The central bank held an intraday repo auction for a fourth consecutive day on Wednesday in order to support the lira, which produced an average yield of 10.88 percent, well above the fixed rate of 5.75 percent of the usual repo auctions.
By 0853 GMT, the lira traded at 1.7835 versus the dollar, stronger than 1.7871 late on Tuesday.
The currency firmed as far as 1.7811 versus the greenback on Tuesday after the central bank's monthly policy meeting indicated a more hawkish bias on combating inflation, although main rates were left unchanged.
"Today, the central bank decided again not to provide funds to the market at a cheap rate of 5.75 percent. One should remember that the average yield of the last three auctions was around 10.90 percent," said Tufan Comert, strategist at Garanti Securities.
Last week the lira touched a two-month low of 1.8250 versus the dollar and pierced the key level of 2.10 versus a euro-dollar basket, due to high oil prices and prospects for an easier monetary policy.
This has pushed the central bank to adopt what it calls an "exceptional days" policy by holding expensive intraday repo auctions to support the lira.
"The continuity of additional monetary tightening is positive for the lira. We think the lira's weakening in early morning would stop and the currency would fluctuate around current levels," Comert added.
The lira traded stronger against the euro-dollar basket at 2.0819, compared with 2.0831 on Tuesday.
The Turkish Central Bank has been pursuing multiple objectives including boosting the lira to tackle inflationary pressures and reducing an large current account deficit while also giving support to a slowing economy.
These goals have resulted since late 2010 in a complex policy mix based on variable daily injections of lira funding, a flexible corridor between base lending and borrowing rates, high bank reserve requirements, and a low policy rate.
BOND YIELDS EXPECTED TO RISE
At its policy meeting on Tuesday, the central bank announced it will reduce daily repo funding to a band of 1-6 billion lira, from a previous 3-7 billion lira, while the upper limit of one-month repo auction volumes was lowered to 5 billion lira from 6 billion for the March 30-April 19 period.
However, some analysts said the effect of this liquidity reduction would be partly offset by the bank's decision to double to 20 percent the amount of lira reserves which banks can hold in the form of gold at the central bank while foreign exchange liabilities could no longer be held in gold, a move seen as giving markets more lira liquidity.
The two-year benchmark bond yield stood at 9.48 percent, unchanged from the previous close.
"As the bank continues with expensive intraday repo auctions, bond yields would continue to increase. Now, it seems more difficult for the benchmark yield to fall below 9.5 percent," Comert said.
Turkey's benchmark yield was at 9.67 percent last Thursday, before the central bank started its exceptional days policy.
Istanbul's main stock index was 0.55 percent down at 62,127 points, in line with a 0.56 percent decline in the MSCI emerging markets index.
Shares in Turkey's Erdemir were 9.25 percent down at 3.62 lira after ArcelorMittal said it was selling 134.3 million shares and the same number of warrants in Turkey's biggest steelmaker.