(Bloomberg) --

The return of optimism to global markets is lifting one of its most troubled corners -- Turkey.

The nation notorious for responding to elevated inflation with low interest rates was among the worst-hit emerging markets after the outbreak of the war in Ukraine. Now as fears of runaway consumer prices ease around the world, bears are finally loosening their grip on the country.   

Turkey’s sovereign credit risk, which surged to a 19-year high last month, has fallen back to 703 basis points this week, the lowest since May, after Russia’s cash transfer into a Turkish subsidiary boosted foreign-currency reserves. The extra yield investors demand to own Turkish dollar bonds rather than Treasuries dropped below 600 basis points on Tuesday for the first time since June. 

“I don’t expect Turkey to run a material risk of a default anytime soon, but at 900 basis points, we were close to an extreme threshold,” Cristian Maggio, the head of portfolio strategy at TD Securities in London. “Any substantial drop from current levels is also likely to be unjustified. So perhaps 500-700 basis points is a reasonable trading range.”

The bond-market recovery comes after gains in equities, where the benchmark gauge posted its biggest weekly surge in 21 months. Short interest on a US exchange-traded fund buying Istanbul-listed stocks fell to the lowest level in 2014 amid a world-beating rally. 

Bonds are steadying amid data that showed the total amount of foreign currency that companies held in Turkish banks jumped about $5.6 billion in seven days. The total reserves, including gold, probably rose $7.3 billion to $108.6 billion last week, Haluk Burumcekci, an independent economist, said in a report. 

Meanwhile, Turkey took a further step toward reducing its dependence on the US dollar, as it entered an understanding with Russia that allows Turkey to abandon the greenback for some of its imports.

Yet, the country’s currency remains in the doldrums. While repeated interventions by state-run banks has steadied the lira after a seven-month slump through July, it continues to trade close to the psychological level of 18 per dollar. 

The lira was down 0.4% to 17.9568 per dollar as of 10:45 a.m. in Istanbul. The currency has lost more than 25% this year and is the worst performer among emerging-market peers. 

Turkey’s consumer-price growth runs at an annual rate of 80% against the central-bank target of 5%. Guided by President Recep Tayyip Erdogan’s unorthodox belief that high interest rates fuel inflation, policy makers have held the benchmark rate at 14% this year, after 500 basis points of cuts in 2021. 

(Updates prices throughout)

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