Indonesia 2014 Bond Yield at Two-Week Low on Inflation Risk

Indonesia’s 2014 bonds advanced, pushing the yield to the lowest in almost two weeks, 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’s priority is to limit subsidized-fuel usage in five big cities with a focus on privately owned vehicles, while increasing prices isn’t the emphasis, Finance Minister Agus Martowardojo said in Jakarta today. 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 the 11 percent bonds due October 2014 dropped one basis point to 4.31 percent as of 3:17 p.m. in Jakarta, prices from the Inter Dealer Market Association show. That was the lowest level since March 11, The difference in yield between two- and 10-year securities widened to 117 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 dropped 0.1 percent to 9,745 per dollar, prices from local banks show. It was at a 0.5 percent premium to one-month non-deliverable forwards, which declined 0.3 percent to 9,790, according to data compiled by Bloomberg.

A daily fixing used to settle the derivatives was set at 9,730 per dollar today by the Association of Banks in Singapore, compared with 9,733 per dollar yesterday.

One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, rose four basis points, or 0.04 percentage point, to 5.90 percent.

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