Turkish markets firm, ignore army campaign report

ISTANBUL, June 20 (Reuters) - Turkish bond and lira markets firmed on Friday as high yields encouraged carry trade investors, while markets shrugged off a newspaper report of an anti-government campaign by the army.

The military -- a secularist opponent of the Islamist-rooted ruling AK Party -- denied a report in the newspaper Taraf that it had waged a secret propaganda campaign to win public support for its opposition to key AK Party policies.

The report comes as the party faces a court case aimed at closing it down, making investors more sensitive to political news. Political uncertainty has helped knock nearly one third off the value of Turkish stocks this year.

The Turkish military has ousted four governments in the past 50 years.

Keeping on a flat trend in intraday trading, the lira <IYIX=> closed 0.3 percent firmer at 1.2235 to the dollar, trimming its loss for this year to just 4.6 percent.

"Local risks are very much on the backburner. We think a move back through 1.2350/65 (in dollar/lira exchange rate) is needed to force any rethink for the time being," said Nicholas Kennedy, an analyst at 4Cast Limited, adding that high yields were keeping the lira firm.

The yield on the benchmark January 13, 2010 bond <0#TRTSYSUM=IS> fell to 21.56 percent from Thursday's 21.83 percent. Last week yields rose to more than 22 percent, almost 600 basis points above last year's closing level of 16.59 percent.

Even small orders have an impact on prices because bond and lira market liquidity was thin, traders said.

Bonds have been hit by rising inflation expectations and on Friday the Central Bank's latest external survey showed year-end inflation was seen at 10.63 percent, up from the previous survey's 10.50 percent. The Central Bank bank last week raised its key interest rates by 50 basis points to rein in rising prices and has said it could tighten further.

The main stock index .XU100 fell 0.25 percent to 37,912.85 points after trading in very thin volumes. (Reporting by Selcuk Gokoluk)