Indonesian bond investors suffering through a third straight month of losses are zeroing-in on this week’s central bank decision and government debt auctions to sustain a nascent turnaround.
The Finance Ministry is selling 10tn rupiah ($658mn) of securities on Tuesday, the same day policymakers announce their interest-rate decision amid ongoing efforts to safeguard against capital flight.
The country’s bonds and currency have been among the world’s worst performers as rising oil prices threaten to exacerbate Indonesia’s trade deficit just as US policy tightening spurs outflows from emerging markets.
Yet, the selloffs have masked a surprising resilience at the country’s debt auctions. Demand for bills and bonds has averaged more than double the amount sold in 2018, and the 2.19 bid-to-cover ratio is up from 2.12 over the previous two years.
With 10-year yields posting their biggest three-day decline since July last week, the auction demand may be a sign of investor confidence in Bank Indonesia’s aggressive policy measures, and a positive signal for the nation’s assets going forward.
“Most of the demand is coming from onshore,” Rohit Garg, an emerging Asia fixed-income and foreign-exchange strategist at Bank of America Merrill Lynch in Singapore, said of the auction results. High real yields are “one of the biggest factors why onshore is still very much interested in Indonesian bonds.’’
Bank Indonesia has raised borrowing costs twice as fast as its US counterpart this year, in addition to intervening in the currency and secondary bond markets to stem slides. The government has also raised import taxes on consumer goods to help rein in the trade deficit, which actually swung to a surplus in September for the first time in three months.
Coupled with a slide in inflation to near the lowest since 2009, rate hikes have boosted Indonesia’s real yields to levels unmatched in Southeast Asia.
Indonesia’s bonds have lost 3.9% so far in October following a similar slide over the previous two months, according to iBoxx ABF data. Emerging-market government securities globally have dipped 0.1% this month, Bloomberg Barclays index figures show.
The Ministry of Finance is selling three- and nine-month bills on Tuesday, as well as bonds due in 2024, 2029, 2033, 2038 and 2048. And while BI is forecast to keep its benchmark rate unchanged at 5.75%, traders will be on the lookout for confirmation policy makers remain committed to defending the rupiah and combating capital outflows. Economists predict about 70 basis points of further tightening through the end of 2019, after 150 basis points of hikes so far this year.
“In general, investors – whether onshore or offshore – think that Indonesian policymakers so far have done a very good job,” said Bank of America Merrill Lynch’s Garg. “I am cautiously optimistic.’’
A general view of Bank Indonesia’s headquarters in Jakarta. Indonesian bond investors suffering through a third straight month of losses are zeroing-in on this week’s central bank decision and government debt auctions to sustain a nascent turnaround.
