(Bloomberg) -- The lira jumped to its strongest level in almost two weeks while bonds and stocks rallied after the U.S. agreed not to impose any further sanctions on Turkey as part of a temporary cease-fire deal in Syria struck between Ankara and Washington on Thursday.
The currency gained more than 1%, erasing losses that were fueled in recent days by concern Washington would impose punitive measures against the Turkish economy in response to the offensive against Kurdish rebels in Syria.
Skirmishes Continue in Syria After Truce Declared: Syria Update
The benchmark stock gauge gained 4%, led by the nation’s largest listed lender, its biggest advance in more than six months. The yield on five-year benchmark bonds dropped more than 160 basis points, falling below 15% for the first time in a week, before trimming the decline.
“The truce deal, even a temporary one, fueled optimism among investors that the risk of sanctions has diminished significantly,” said Can Oksun, senior manager of institutional sales at Global Securities in Istanbul. “The mood is broadly more positive.”
The agreement enshrines Turkish control of a 20-mile deep “safe zone” in northern Syria, representing a victory for President Recep Tayyip Erdogan, who had been seeking one for years. The U.S. has also promised to withdraw sanctions announced earlier this week once a permanent cease-fire takes effect.
‘Brutal’ House Bill
Still, risks remain. Republican and Democratic lawmakers have vowed to move ahead with sanctions despite Thursday’s announcement. The measures would penalize Turkish leaders, financial institutions and its energy sector, as well as prohibit any U.S. firms or individuals from buying the country’s sovereign debt.
“If this bill holds as is and is passed it would be brutal,” said Timothy Ash, a strategist at BlueBay Asset Management in London. “Sanctioning sovereign debt would be lights out for Turkey, given it has $180 billion in short-term external debt to finance every year.”
While there is strong bipartisan opposition to Turkey’s incursion into northern Syria, Senate leaders haven’t committed to bringing a sanctions bill to a vote.
The lira was trading 0.9% stronger at 5.7821 per dollar as of 2:02 p.m. in Istanbul. The yield on five-year notes were trading 127 basis points lower at 15.13%.
The relief rally is also opening the way for further interest-rate cuts in Turkey. Traders had started scaling back wagers for lower borrowing costs amid a sell-off in the lira this month, as speculation grew that the central bank will seek to shield the currency from the fallout of rising geopolitical tensions.
Turkish Rate Cuts on the Line After Erdogan’s Foray Into Syria
The one-month forward implied yield on the Turkish currency -- a rough gauge of where the market sees short-term borrowing costs settling -- dropped below 14%, nearing a more than one-year low touched last month and about 250 basis points below the central bank’s benchmark.
BlueBay’s Ash expects the the monetary authority will cut the one-week repo rate by 200 basis points when it meets next on Oct. 24. The central bank has slashed interest rates by 750 basis points since July to stimulate the Turkish economy, which is recovering from its first recession in a decade.
(Updates prices throughout, adds detail on interest-rate outlook in final three paragarphs)
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