ISTANBUL, April 12 (Reuters) - Turkish bond yields hovered close to record lows and the lira eased slightly on Friday on expectations of a central bank interest rate cut this month.
Local shares were outperforming emerging peers driven by hopes of another rating upgrade for Turkey after Moody's said progress towards peace with Kurdish militants was positive for its creditworthiness.
By 0810 GMT, the lira had eased slightly to 1.7897 to the dollar from 1.7860 late on Thursday. Against its euro-dollar basket it was flat at 2.0644.
The yield on the two-year benchmark bond stood at 5.73 percent, after falling as low as to 5.66 percent in early trade, just a touch away from a record low of 5.63 percent it hit on Feb. 21. It closed at 5.69 percent on Thursday.
'Expectations the central bank may cut its rates at its monthly meeting next Tuesday boosted buying for the short-term bonds,' wrote Ali Cakiroglu, strategist at HSBC Asset Management.
Central Bank Governor Erdem Basci said last week the bank may consider cutting its one-week repo policy rate if the lira appreciates too sharply.
A stronger lira makes Turkish exports more expensive and imports cheaper, which could widen its already high current account deficit. The gap is expected to grow to over $58 billion at the end of 2013 from just under $47 billion in 2012, according to a Reuters poll.
Istanbul's main share index was up 0.76 percent at 84,737 points, largely outperforming a fall of 0.63 percent in the global emerging markets index.
'Moody's upgrade seems to be around the corner,' wrote analysts at Oyak Securities. The ratings agency currently rates Turkey at Ba1 with a positive outlook, just below investment grade.
The rally in the bond market was also supportive for equities, some analysts said, as the fall in yields increases the value of banks' bond portfolios, having a positive effect on their profitability.
(Writing by Seltem Iyigun; editing by Patrick Graham) Keywords: MARKETS TURKEY/
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