Fed gives Turkey firepower to decrease rates

Some of the worst-performing bonds in emerging markets just got a little help from the U.S. Yields on Turkey's two-year government notes dropped to their lowest in more than two weeks after the U.S. Federal Reserve (Fed) said the pace of interest rate increases would not be as fast as initially thought. The longer American rates remain lower than previous forecasts, the greater the demand tends to be for riskier emerging markets where returns are higher.

The Fed's changing stance on the pace of tightening monetary policy could pave the way for the Central Bank of the Republic of Turkey (CBRT) to resume cutting the cost of borrowing after keeping rates on hold in March. With inflation slowing and oil prices falling, Turkish bonds are expected to benefit, said Lutz Roehmeyer, a money manager at Landesbank Berlin Investment.

"The Turkish central bank now has more flex to maneuver," said Roehmeyer, who oversees $1.1 billion of debt from developing nations. "Short-term Turkish bonds can rally." Turkish policy makers, led by CBRT Governor Erdem Başçı, kept the main interest rate of one-week repo on hold at 7.5 percent this month after cutting it by a combined 75 basis points during the first two months of the year.