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Indonesia Two-Year Bond Yield at 13-Month Low on Inflation Risk

Indonesia’s two-year bonds advanced, pushing the yield to a 13-month low, as investors favored short- dated notes on concern a push to reduce the burden of fuel subsidies on the budget will spur inflation.

The government isn’t ruling out the possibility of raising subsidized-fuel prices, Finance Minister Agus Martowardojo said yesterday, adding that it is only considering controlling usage at this stage. The budget deficit may exceed 2 percent of gross domestic product in 2013, exceeding the 1.65 percent target, he said on March 19.

The yield on Indonesia’s 11 percent bonds due October 2014 dropped four basis points to 4.27 percent as of 9:23 a.m. in Jakarta, the lowest level since Feb. 21, 2012, prices from the Inter Dealer Market Association show. The spread between the yields on the two- and 10-year securities widened to 119 basis points, the most since June.

“So long as inflation expectations keep rising, the gap will widen as the market shies away from longer-term assets and takes up shorter ones,” said Mika Martumpal, a currency analyst at PT Bank CIMB Niaga in Jakarta. “There is certainly concern over the fuel subsidy policy and the higher budget deficit.”

Bank Indonesia may need to take a tightening stance to curb inflation expectations, with or without adjustments to the fuel subsidy policy, DBS analysts led by David Carbon in Singapore wrote in a research note released today.

The rupiah traded at 9,728 per dollar, compared with 9,732 yesterday, prices from local banks show. It was at a 0.4 percent premium to the one-month non-deliverable forwards, which were steady at 9,765, according to data compiled by Bloomberg.

A daily fixing used to settle the derivatives was set at 9,733 per dollar yesterday by the Association of Banks in Singapore, compared with 9,705 the previous day. Today’s rate will be released at 11:30 a.m. in the city-state.

One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, fell 14 basis points, or 0.14 percentage point, to 5.72 percent.

To contact the reporter on this story: Yudith Ho in Jakarta at yho35@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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