Monetary policy may affect public borrowing costs through the shape of the yield curve and the demand for borrowing auctions. During periods of tight monetary policy, short-term interest rates rise along with the policy rate, while falling inflation expectation may lower long-term interest rates. [1] Similarly, disinflation efforts strengthen banks’ risk appetite and risk-bearing capacity towards borrowing instruments by fostering predictability. Thus, the elasticity of the demand curve for bond re-issuance auctions increases and interest rate changes in the secondary market remain limited. In this blog post, we analyze the impact of the tight monetary policy stance to reduce the borrowing costs in the context of the re-issuance auctions held by the Republic of Türkiye Ministry of Treasury and Finance (the Treasury).
The demand curve for the Treasury borrowing auctions can be calculated using price-quantity data up to the auction cutoff point (Chart 1). [2] The demand curve for the Treasury auctions demonstrates the relationship between the amount and cost of borrowing. It should be noted that the flattening of the demand curve indicates an increase in price elasticity. Considering the inverse relation between bond prices and yields, a more elastic (flatter) curve leads to a fall in the Treasury’s costs given the same amount of borrowing.
The monetary policy stance plays a supportive role in shaping the elasticity of the demand curve. In fact, considering a conjunctural analysis of the quantity and price values in the Treasury’s borrowing auctions, it is observed that a more elastic demand curve appears during the periods of tight monetary policy (Chart 2). [3] The main point here is associating the flattening of the auction demand curve with the increased risk-bearing capacity of banks. [4] In an environment of tight monetary policy, the upward shift of the curve’s far end diminishes the effect of quantity on price. In other words, the flattening of the curve indicates that demand conditions in auctions have improved, and the Treasury has been able to borrow at lower costs.
The results of the analysis point to the positive effect of the tight monetary policy on the primary market. Chart 3 shows the impact of the elasticity change of auctions on the borrowing costs. The shaded area depicts the resulting decline in borrowing costs through the increased elasticity channel led by the tight monetary policy stance. Focusing on the CBRT's latest monetary tightening cycle, it is seen that borrowing costs at auctions of the Treasury re-issuances dropped by 40 basis points on average. We estimate this decline in the borrowing costs to have contributed approximately TRY 6.8 billion to the public finance.
To sum up, while tight monetary policy increases yields in bond markets through the monetary transmission channel, it supports the demand elasticity in re-issuance auctions through the predictability and expectations channels. The increased elasticity driven by predictability and credibility points to an increase in the risk-bearing capacity of banks. Thus, it is considered that the CBRT’s policy stance bolsters the financial system and contributes to public finance through the Treasury auctions.
[1] This usually appears during periods of tight monetary policy and reflects the expectation that interest rates will fall in the future, known as the inverted yield curve, due to lower inflation or decelerating economic activity.
[2] Price elasticity of demand is calculated by the formula (𝜕𝑄/𝜕𝑃)*(𝑃/𝑄). In all elasticity measurements, P represents the cutoff price and Q represents the cutoff quantity at the auction. The cutoff point, auction bids and elasticity are synthetically produced to demonstrate the charts. The analyses are conducted by actual auction data.
[3] The elasticity of demand is estimated using the pre-auction secondary market price change, secondary market liquidity, duration of the security issued, secondary market volatility and the dummy variable for monetary policy tightness. The study uses a cross-sectional dataset of fixed coupon security auctions (re-issuances) held between January 2018 and December 2024. The CBRT’s rate hike cycles are considered as periods of tight monetary policy. The elasticity coefficient is calculated for the case of the same nominal amount of the Treasury borrowing.
[4] See Albuquerque et al. (2024) and Çelebi et al. (2025).
References
Albuquerque, R., Cardoso-Costa, J. M., & Faias, J. A. (2024). Price elasticity of demand and risk-bearing capacity in sovereign bond auctions. The Review of Financial Studies, 37(10), 3149-3187.
Çelebi, A. İ., Demir, A. T., & Özbekler, A. G. (2025). Banks’ risk bearing capacity in the nexus of demand and supply driven bond auctions. Forthcoming.