Falling US bond yields seen boosting capital flows to developing markets

By Ali Canberk Ozbugutu and Burhan Sansarlioglu

ISTANBUL - Declining US 10-year Treasury yields are expected to benefit developing countries such as Türkiye by strengthening capital flows amid global monetary policy uncertainty and geopolitical risks, analysts say.

Recent US macroeconomic data point to easing inflation and a cooling labor market, fueling expectations that the Federal Reserve could take a more dovish stance.

Markets widely expect the Fed to cut interest rates three times this year, beginning in June.

Those expectations spurred heavy buying of US government bonds, pushing the 10-year yield down to 4.02% on Tuesday before it stabilized at 4.09%.

Experts say external borrowing costs -- determined by the US 10-year yield and countries’ credit default swap premiums -- are likely to decline further in the near term.

Türkiye’s regional stance has supported foreign demand for Turkish lira assets and reduced borrowing costs, analysts said.

The country’s five-year CDS has declined since April 2025, falling to 202.7 basis points by early January. Regional geopolitical tensions briefly lifted the CDS to 218 basis points, but confidence in Türkiye’s economic policies eased most concerns.

Nonresident investors, excluding foreign branches of Turkish banks, have been net buyers in Türkiye’s bond and stock markets over the past six weeks.

In the week of Feb. 6, nonresidents bought $134.3 million in stocks and $255.6 million in government debt securities. Net purchases of government debt securities over the six-week period totaled $4.233 billion.

Nonresident holdings of government debt securities rose to $22.57 billion by early February, while their stock holdings declined to $41.53 billion.

- Demand for safe havens

Filiz Eryilmaz, an economics professor at Uludag University in Bursa, said investors have increasingly turned to 10-year bonds as safe havens amid short-term uncertainties, including US-Iran tensions.

“Gold and silver are no longer seen as safe havens,” she said, adding that lower yields reduce risk premiums for emerging markets and attract capital.

“The decline in the risk premium lowers borrowing costs in Türkiye, and it causes borrowing costs to fall even further because the US 10-year bond yield is the benchmark,” she said. “Risk appetite is rising and naturally it is making it easier to find liquidity and borrow funds, creating a very positive trend for developing countries.”

Ismet Demirkol, founder of the Turkish consultancy firm Pariterium, said expectations of three Fed rate cuts, US President Donald Trump’s tariff policies and a weakening dollar have contributed to the decline in bond yields.

“The decline in US 10-year bond yields and Türkiye’s falling CDS are contributing to a reduction in the country’s long-term dollar borrowing costs,” he said.

*Writing by Emir Yildirim