Indonesia bonds are a top choice for EM investors

Indonesian bonds have outperformed most of their emerging Asian peers in 2022 and a number of investors are betting that will be the case for next year too.
The nation’s debt may benefit from foreign inflows attracted by one of the highest real yields in the region and the prospect that interest-rate hikes are nearing their peak, according to William Blair Investment Management. JPMorgan Asset Management is overweight on Indonesia, while DBS Bank Ltd sees the country’s bonds outpacing their regional counterparts.
“Indonesian bonds are relatively attractive compared to emerging Asian peers, with higher real yields than the likes of India and Thailand,” said Johnny Chen, a money manager at William Blair Investment in Singapore. “As inflationary pressures dissipate in the US and the Fed slows the pace of hikes, the rupiah will likely benefit from portfolio flows.”
Indonesia’s debt — considered one of the bellwethers for global emerging markets — is gaining attraction as the central bank is seen nearing its terminal rate, while policy makers in the US are expected to keep tightening for some time. Relatively high yields and a law seeking to expand the central bank’s mandate to buy government bonds in times of crisis may also bolster the Asian nation’s securities.
Indonesia’s bonds have done better than most of their regional peers in 2022 in what has been a difficult year for global debt markets. The securities delivered a loss of 5.9% for dollar-based investors, behind only Malaysia and China in emerging Asia. Bonds in Taiwan, the Philippines and South Korea all slid more than 10%.
Rupiah bonds are likely to keep attracting inflows as they offer some of the highest real yields in the region, according to DBS Bank, which expects foreign inflows of $3bn to $7bn next year.
Indonesian debt may also benefit amid light positioning after overseas investors trimmed their holdings by about $7.5bn this year, a record outflow in data compiled by Bloomberg starting in 2010. Global funds have already started returning, snapping up $1.5bn of the securities in November and about the same in December so far.
“The technical picture of the Indonesian bond market is also cleaner as foreign exposure has collapsed over the course of the last couple of years and positioning is far from heavy,” said Kenneth Akintewe, head of Asian sovereign debt at abrdn in Singapore.
“A potential recovery in EM flows would likely strongly benefit Indonesian rates and FX,” he said. “A lot can still go wrong, FX volatility remains elevated and yields are some ways away from the cheaper levels seen in October so investors still have to tread carefully.”
Indonesia’s 10-year bond yields fell by 60 basis points in November, the biggest decline in four years, as inflation slowed and traders bet Bank Indonesia will slow its pace of rate hikes. They have still climbed more than 50 basis points in 2022.
“Just reducing underweights can move these markets quite significantly,” said Lin Jing Leong, a rates strategist at Columbia Threadneedle Investments in Singapore. “With Indonesia being more high yielding than all other Asian markets, it tends to be the first one that investors re-enter, and reform fundamentals are quite positive.”