Latest CB Measures Ease Recent Spike in CDS; TRY Remains Volatile

Bloomberg report that the Turkish central bank has asked some local lenders to purchase dollar bonds, in what is the latest attempt to provide a backstop to pressure on Turkish assets. The request was made on Monday and was aimed at keeping borrowing costs stable and fend off a spike in credit default swaps.

• The measure appears to have had some success, with 5Y credit default swaps dropping approximately 40bps from its recent peak in the wake of the first round of the Presidential elections on May 14 (Figure 1).
• TRY has continued to weaken at an increasing pace in recent weeks, though the measures appear to have slightly reduced the spread between the official spot rate and the unofficial Grand Bazaar rate in recent days (Figure 2). On the other hand, 1M implied TRY volatility, though off its recent highs, remains elevated ahead of the runoff elections on Sunday (Figure 3).
• Later today, the CBRT are expected to hold its key rate steady at 8.5% (MNI Preview: https://roar-assets-auto.rbl.ms/files/53087/MNICBRTPrevMay23.pdf). There are scant expectations for a notable market reaction to the decision amid the continued participation and intervention from state banks on currency rates. As such, market focus remains on second round runoff election on Sunday.