Is the CBRT heading toward a rate hike?

Bond market signals panic

The Iran war has triggered a sharp shift in market expectations in Türkiye, with investors now pricing in potential interest rate hikes by the Central Bank of the Republic of Türkiye (CBRT). Surging energy prices, rising inflation risks, and heavy foreign outflows have pushed bond yields sharply higher, signaling the end of the rate-cut narrative and the possible start of a new tightening cycle.

Global bond markets suffer historic losses

The energy shock triggered by the Iran war has caused a massive selloff in global bond markets.

• Total losses exceeded $2.5 trillion in March
• Market size fell from $77 trillion to $74.4 trillion

This marks the steepest monthly decline since September 2022.

Rate cut expectations reverse sharply

Rising oil prices and inflation concerns have forced a major repricing in global monetary policy expectations.

• Markets now price in more than 60 basis points of rate hikes in emerging markets over the next 12 months
• At the start of March, investors were expecting rate cuts of 25 basis points

This reversal highlights the scale of the shock.

Turkish bond yields surge

Turkish lira-denominated government bonds have been hit particularly hard.

• 2-year yield: 44.7%
• 5-year yield: 40.02%
• 10-year yield: 35.27%

These are the highest levels seen since mid-2025, reflecting intense selling pressure.

Turkish assets hit by Iran war fallout as foreign investors exit

Markets price in CBRT tightening

The sharp rise in yields suggests that markets are now expecting a shift in CBRT policy.

Key drivers include:

• Rising inflation expectations
• Oil prices holding above $95 per barrel
• CBRT’s earlier assumption of $60 oil prices proving outdated

This has increased the likelihood of a rate hike at the upcoming April policy meeting.

Foreign outflows accelerate

Geopolitical risks have triggered a rapid exit of foreign capital from Türkiye.

• Bond outflows (first two weeks): $4.6 billion
• Equity outflows: over $1 billion

This marks one of the sharpest capital outflows in recent years.

Carry trade unwinds rapidly

Short-term inflows driven by high interest rates are also reversing.

• Total carry trade outflows: $12 billion in two weeks

This unwinding is adding further pressure on the lira and domestic markets.

How the Iran Conflict is Destabilizing the Turkish Economy

Risk premium rises

Türkiye’s sovereign risk indicators have deteriorated.

• 5-year CDS climbed to 311 basis points
• Weekly increase: 38 basis points

This reflects a worsening perception of country risk.

Markets swing on Trump–Iran headlines

Global markets have been highly volatile.

• Relief rallies followed statements by US President Donald Trump about “productive talks” with Iran
• Renewed selloffs came after Iran denied negotiations

Borsa Istanbul mirrored this volatility, closing the day up 0.92% after sharp intraday swings.

Analysts: The narrative has changed

Market experts say the investment story for Turkish assets has shifted fundamentally.

• The rate-cut cycle is effectively over
• Tight monetary policy is back on the agenda
• Foreign investor appetite has weakened

This reduces the attractiveness of both bonds and equities.

PA Turkey News Desk, Şebnem Turhan, Bloomberg

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