Türkiye’s CDS risk premiums fall to pre-conflict level

Türkiye’s five-year credit default swap (CDS) risk premiums fell from as high as 327 basis points in March, which was led by the US and Israel’s war in Iran, by 100 basis points to 230.4 basis points amid easing geopolitical tension expectations, returning to pre-war levels.

Optimism over US–Iran negotiations contributed to Türkiye’s risk perception.

US President Donald Trump announced that a new meeting could take place in Pakistan within two days, signaling to markets that the war could be over soon, boosting optimism.

⁠Optimism over peace and declining oil prices led to a slight easing in global inflation concerns, alongside easing concerns of a potential hawkish stance by the Fed and the US dollar’s weakening, which in turn boosted demand in the bond markets.

Money markets still strongly expect the Fed to maintain a cautious stance through the end of the year, but borrowing costs began to trend downwards alongside the buying trend seen in global bond markets.

The US 10-Year Treasury bond yield fell 5 basis points to 4.26% on Tuesday, and it stands at 4.25% on Wednesday, while the 5-Year Treasury bond yield dropped to 3.8710%, its lowest in about a month.

Türkiye’s CDS began to decline amid falling bond yields in global markets — the country’s CDS had been around 235 basis points before the US and Israel launched their joint attacks on Iran on Feb. 28.

Meanwhile, the difference between Türkiye’s CDS and those of emerging markets narrowed to 74.6, its lowest since Feb. 7, 2020.

Türkiye’s Central Bank (TCMB) took steps throughout the conflict to prevent massive fluctuations in foreign exchange markets with swift action in reserve management and liquidity tools.

Banks resumed swap transactions with the TCMB, indicating that there is no foreign exchange liquidity shortage in the system and that the exchange rate regime is functioning properly.

With its foreign exchange for Turkish lira swap transactions scheme, the country's central bank hopes to reduce credit and interest rate volatility while also giving banks more flexibility in managing the country's domestic currency liquidity.

With this measure, the bank hopes to prevent a Turkish lira shortage in the markets as well as protect banks from liquidity issues, all while making credit conditions more reasonable.

*Writing by Emir Yildirim