The cost of insuring exposure to Türkiye's sovereign debt fell Wednesday to its lowest level in about six-and-a-half months, as expectations of easing geopolitical risks in the Middle East and steps by the central bank on liquidity management supported investor sentiment.
Türkiye's five-year credit default swaps – a form of insurance for bondholders – fell to 217 basis points, a level not seen since Feb. 18, days before the U.S. and Israel launched the war against Iran. The premium had soared to above 320 basis points around early April.
Emerging-market risk premiums have generally declined as signs of a possible easing in tensions between the U.S. and Iran raised hopes for renewed diplomatic talks and a more lasting resolution to the conflict.
Reports that the U.S. government is preparing to return diplomats to some embassies evacuated during the war, along with comments from mediating countries that negotiations between the sides could resume, helped improve sentiment.
The developments also eased concerns over energy supplies, sending oil prices sharply lower. Brent crude futures for October delivery fell 3.9% to $88.60 a barrel, while the U.S. 10-year Treasury yield declined about seven basis points to 4.63%.
Domestic developments also contributed to the decline in Türkiye's risk premium.
The Central Bank of the Republic of Türkiye (CBRT) Monday resumed one-week repo auctions, which had been suspended since March due to heightened market volatility following the outbreak of the Iran war.
During the suspension, banks' liquidity needs were largely met through the CBRT's overnight lending facility at a 40% rate.
The resumption of weekly repo operations is viewed as a signal that the central bank was moving back toward its normal operational liquidity framework.
The move strengthened expectations that banks' funding costs could move closer to the 37% policy rate and that market interest rates could decline.
Türkiye's two-year bond yield also fell below 40% for the first time since July 2, while longer-dated yields edged down more modestly.
Spinn Consulting founding partner and economist Özlem Derici Şengül said several factors were behind the decline in Türkiye's CDS, with the biggest immediate impact coming from lower bond yields.
She said inflation expectations and other macroeconomic risks had not yet improved significantly, making the decline in bond yields a more important driver of the fall in the country risk premium.
According to Şengül, the resumption of weekly repo auctions could also be considered one of the factors, but she noted this is yet to be reflected in actual funding costs.
"The factors coming to the fore are global conditions, the decline in oil prices and the easing of the war to some extent," she said, adding that expectations of a possible CBRT rate cut and stronger reserves were also supporting the decline in CDS.
She cautioned that risks remained, including the possibility that U.S. sanctions on Iran could affect Türkiye, particularly given the country's imports of Iranian natural gas.
A renewed escalation in the conflict could push oil prices higher again, while deterioration in inflation expectations or a slowdown in reserve accumulation could also limit the decline in Türkiye's risk premium.
Seda Yalçınkaya Özer, head of strategy and investment advisory at Yatırım Finansman, said Türkiye's CDS move should be viewed against both global and domestic developments.
She said expectations of diplomacy involving Iran, Pakistan and Oman, along with the U.S. avoiding direct sanctions on Chinese banks, had reduced the risk premium embedded in oil prices.
"There is a general narrowing in emerging-market risk premiums globally," Özer said, noting that the easing of tensions in the Middle East and lower commodity prices had boosted risk appetite across emerging markets rather than Türkiye alone.
She cautioned that a potential Iranian retaliation could quickly reverse current market pricing.
For Türkiye, however, oil prices below $90 a barrel are clearly positive for the current account balance, fuel prices, inflation and the CBRT's room for monetary policy, she said.
Özer also described the CBRT's return to weekly repo auctions after roughly six months as a "critical signal."
Moving funding costs from around 40% overnight toward the 37% policy rate could be interpreted as a concrete step toward easing financial conditions and has brought the possibility of a rate cut in September back into focus, she said.
"The market is pricing this as confirmation that the normalization process is continuing, alongside a gradual slowdown in inflation."
