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Indonesian Two-Year Bonds Rise After Rate Meeting; Rupiah Falls

Indonesia’s two-year bonds extended gains, pushing the yield toward a record low, on speculation investors favor shorter-term notes after the central bank refrained from raising borrowing costs to tackle inflation.

Bank Indonesia kept its benchmark reference rate unchanged at a record-low 5.75 percent for a 13th month today, as predicted by all 21 economists surveyed by Bloomberg. Consumer prices rose 5.31 percent in February from a year earlier, the most in 20 months. Short-term bond prices tend to fluctuate less than long-term ones as inflation quickens or slows. Global funds added 2.83 trillion rupiah ($292 million) to their local-currency sovereign debt holdings this month through March 5, finance ministry data show.

The yield on the government’s 11 percent debt due October 2014 dropped four basis points, or 0.04 percentage point, to 4.27 percent as of 3:16 p.m. in Jakarta, prices from the Inter Dealer Market Association show. That is nine basis points off an all-time low of 4.18 percent reached on Feb. 15. The yield on 10-year notes was little changed at 5.33 percent.

“The central bank’s steady policy allowed for a further rally in bonds, though investors still prefer shorter durations because of inflation,” said I Made Adi Saputra, a fixed-income analyst at PT Nusantara Capital Securities in Jakarta. “Yield-seeking foreign investors are still buying local notes in abundance.”

Reference Rate

The rupiah’s one-month non-deliverable forwards weakened 0.1 percent to 9,722 per dollar, data compiled by Bloomberg show. They traded at a 0.3 percent discount to the spot rate, which declined 0.1 percent to 9,694, prices from local banks show. A daily fixing used to settle the rupiah derivatives was set at 9,699 today, from 9,688 yesterday by the Association of Banks in Singapore.

One-month implied volatility in the rupiah, which measures expected moves in the exchange rate used to price options, dropped 10 basis points to 5.78 percent.

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