Global term premium reaches Türkiye: the 2-year yield tops the 37% policy rate as net reserves shed 6.4 billion dollars in a week

What happened: two days, two weak auctions

On 23 September the US Treasury sold 70 billion dollars of 5-year notes at 5.033%, with a 3.1 basis-point tail; indirect participation had fallen to 54.31%. The following day the 44-billion-dollar 7-year auction cleared at 5.085%, the highest yield since April 1993. The tail was smaller at 0.7 basis points, but the demand indicators showed that the weakness was not confined to a single day: the bid-to-cover ratio fell from 2.50 at the previous auction to 2.42, and indirect participation, which represents foreign central banks and funds, came in at 57.2%, about 7 points below the recent-auction average of 64.6%.

According to the US Treasury par curve, on 24 September the 2-year yield stood at 4.87%, the 10-year at 5.18% and the 30-year at 5.47%. A day earlier the 10-year had been at 5.11% and the 30-year at 5.40%. The same day New York Fed President Williams said one more hike by year-end was reasonable; according to CME FedWatch data cited by CNBC, the probability of a hike at the 28 October meeting rose to 77.5%. Different sources put this probability between 70% and 78%. The Fed had raised its policy rate to a 3.75–4.00% range on 16 September.

The move is not specific to the United States. According to Trading Economics data, on 24 September the German 10-year yield was at 3.60%, its highest since mid-2009, the French 10-year rose to an 18-year high of 4.72%, and the France–Germany spread widened from 102 basis points on 22 September to about 112 basis points. Japan's 30-year yield climbed to 4.164%. Norway's central bank raised its rate from 4.25% to 4.50% that same morning, while Sweden's central bank held at 1.75% but signalled that hikes would begin this year.

Why now: good data turned into bad news for bonds

The trigger pushing yields higher is not geopolitical news but growth data. On 23 September the US flash composite PMI rose to 58.4 and the euro area composite PMI to 53.1; on 24 September Germany's Ifo business climate index reached 89.9, its highest since May 2023. With the energy shock still under way, every strong data print reinforces the expectation that central banks will prolong the fight against inflation. The Brent futures contract settled 3.4% higher at 106.60 dollars on 24 September; the rise since the start of September has exceeded 17%.

This combination is demanding higher compensation from investors for holding long-dated bonds. If policy expectations alone were decisive, the 2-year yield would rise faster than the 10- and 30-year; on 24 September, however, the largest increase came at the long end of the curve. The US 30-year yield rose 7 basis points in a single day. This is a sign that tightening has shifted from policy-rate expectations to the term premium, that is, the extra yield demanded for duration. The VIX volatility index remaining at 15.67 on 24 September shows that stress is accumulating in the debt market rather than in equities.

The stronger dollar is the second leg of the same channel. The dollar index rose to 101.25 on 24 September. Together, high US yields and a strong dollar raise both the cost of borrowing and the cost of defending the local currency for emerging economies with large external financing needs. Argentina's country risk premium rose from 400 basis points at the end of July to 566 basis points on 23 September; this is the most visible example of the same wave in emerging markets.

Transmission to Türkiye: the front end moved before the policy rate

In Türkiye, transmission showed up simultaneously in three data points on 24 September. First, according to investing.com data, the 2-year benchmark bond yield rose from 36.43% on 23 September to 37.09%, surpassing the 37% policy rate; the 10-year yield rose from 32.52% to 32.64%. Second, the BIST 100 index fell 2.74% to 12,888.33 points; the banking index fell 3.06% and the holding index 3.87%. Third, according to weekly data released by the CBRT the same day, in the week of 18 September gross reserves fell by 4.32 billion dollars to 174.4 billion dollars and net reserves by 6.41 billion dollars to 55.84 billion dollars. Net reserves excluding swaps fell by 6.8 billion dollars to 43.1 billion dollars.

A near-term yield rising above the policy rate indicates that the market expects the CBRT either to take a rate step or to make liquidity more expensive. On 10 September the CBRT held the policy rate at 37% and the overnight lending rate at 40%. In an environment where reserves are being used to hold the exchange rate in its record zone and the cost shows up in net reserves, the front end of the yield curve may have begun to price the central bank's non-rate tools. How much of the reserve loss stems directly from foreign-exchange sales has not been officially disclosed; this breakdown could not be verified.

The dollar/lira rate held in its historic record zone at 48.87 on 24 September; it had touched 48.82 on 22 September and 48.84 on 23 September. Türkiye's 5-year CDS premium rose from 232.80 basis points on 18 September to 240.86 on 23 September. This 8-basis-point rise in the risk premium was limited compared with the move in the yield curve: for now the decisive channel is not Türkiye-specific credit risk but the global base rate and the dollar.

The energy bill adds separate pressure to the same picture. Brent's return to 106.60 dollars passed quickly through to pump prices: after a cut of about 5.5 lira on 24 September, diesel rose by 2.55 lira on 25 September to 93.45 lira on Istanbul's European side. Consumer inflation, at 31.51% year on year in August, is forecast at 31.5% for 2026 in the OECD's interim report of 23 September. On 24 September the EBRD cut Türkiye's 2026 growth forecast from 3.5% to 3%, and the OECD from 3.1% to 2.7%. Growth forecasts are falling while the inflation forecast holds steady; this narrows monetary policy's options.

Constraints: which tools does the CBRT have left

The CBRT has three paths before it, and the cost of each can be seen in numbers. The first is to keep defending the currency with reserves: if the net loss of 6.41 billion dollars in the week of 18 September continues at that pace, net reserves would approach the 50-billion-dollar threshold within a few weeks. The second is to tighten liquidity, that is, to shift funding to the overnight lending rate (40%) above the policy rate; the 2-year yield exceeding 37% shows that the market has partly priced this path. The third is to raise the policy rate; at a time when growth forecasts have fallen to the 2.7–3% range, this would push up the real sector's financing costs further.

Fiscal policy can help only to a limited extent. Central government debt stock rose to 15.89 trillion lira in August and the foreign-currency share reached 51%; higher global rates and a stronger dollar directly increase the lira value of this stock and its interest burden. Figures on compound yields at the Treasury's domestic borrowing auctions could not be verified from a primary source tonight and were therefore not used in this report.

On the external side the decisive date is the 28 October FOMC meeting. If FedWatch's 77.5% hike probability materialises, near-term US rates will rise above 4%. This would reduce the relative appeal of carry returns on lira assets and sustain reserve pressure. Conversely, if US auction demand recovers and the 10-year yield returns below 5%, the triple pressure Türkiye experienced on 24 September (yields, equities, reserves) could ease quickly.

Thresholds to watch and uncertainties

Three thresholds will test this report's reading. The US 30-year yield exceeding 5.5% would show that the term-premium wave is deepening; at 5.47% on 24 September it stood 3 basis points short of that threshold. Türkiye's 5-year CDS exceeding 250 basis points would mark the zone where the global rate channel turns into Türkiye-specific credit risk. Net reserves falling below 50 billion dollars would mark the point at which currency defence cannot be sustained without a rate step.

The uncertainties must be stated plainly. The 24 September close for Türkiye's CDS was not available in the sources accessed tonight; the latest value is from 23 September. The probability of an October FOMC hike ranges from 70% to 78% depending on the source. Brent's 24 September close ranges between 106.45 and 106.77 dollars depending on the source; the report uses CNBC's settlement price of 106.60 dollars. The composition of the reserve loss and state banks' foreign-exchange transactions could not be verified because they have not been officially disclosed.