Indonesian Bonds Fall to Eight-Week Low on Inflation Concern

Indonesia’s bonds fell to the lowest level in eight weeks and the rupiah declined on concern government plans to raise subsidized fuel prices may stoke inflation, eroding returns on sovereign debt.

Overseas funds pared 1.1 trillion rupiah ($116 million) from their holdings of local bonds this month through March 9, according to data compiled by Bloomberg. The government will meet with parliament later this month to discuss reducing energy subsidies after it proposed adjusting the inflation target in its revised 2012 state budget to 7 percent from 5.3 percent.

“The rupiah will tend to weaken,” said Apressyanti Senthaury, a Jakarta-based analyst in the treasury division of PT Bank Negara Indonesia. “Higher inflation expectations are a major concern for investors, which weighs on the bond markets.”

The yield on the government’s 7 percent bonds due May 2022 rose 10 basis points, or 0.1 percentage point, to 5.97 percent, according to closing prices from the Inter-Dealer Market Association. That was the highest yield since Jan. 17, a day before the country won a rating upgrade from Moody’s Investors Service which returned it to investment level.

The rupiah weakened 0.1 percent to 9,173 per dollar as of 4:08 p.m. in Jakarta, after falling as much as 0.4 percent earlier, according to prices from local banks compiled by Bloomberg. One-month implied volatility in the rupiah, which measures exchange-rate swings used to price options, held at a four-week low of 8.25 percent.

The central bank will continue to observe and intervene in the foreign-exchange and secondary bond markets to stabilize the currency, according to a note posted on its website last week.

“The rupiah is unlikely to weaken beyond 9,200 per dollar,” Senthaury said. “It’s difficult for Bank Indonesia to maintain the currency at a stronger level than that considering global factors like the stronger dollar.”

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