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Indonesia Two-Year Bond Yield Surges on Tightening Speculation

April 5 (Bloomberg) -- Indonesia’s two-year bonds dropped, with the yield rising the most in three months, on speculation the central bank will increase its deposit facility rate that is used as a benchmark for short-term notes.

Bank Indonesia can’t avoid raising rates if necessary and increasing the benchmark rate isn’t easy, Governor Darmin Nasution said in Jakarta today, before the next review on April 11. DBS Group Holdings Ltd., Australia & New Zealand Banking Group Ltd. and Bank of America Merrill Lynch expect the monetary authority to start lifting the deposit facility rate, or Fasbi, according to research notes this week. Inflation quickened to a 22-month high of 5.9 percent last month, official data show.

“The market is reacting to the governor’s comment, where he showed uncertainty for once, when before he would assure markets that inflation is manageable,” Dini Anggraeni, a fixed-income analyst in Jakarta at PT Mandiri Sekuritas, a unit of the nation’s largest lender by assets. “Bank Indonesia will likely raise the Fasbi first, the benchmark for short-term rates.”

The yield on the government’s 11 percent bonds due October 2014 climbed 12 basis points today to 4.47 percent, the biggest advance since Jan. 2, closing prices from the Inter Dealer Market Association show. The rate rose one basis point this week.

Bank Indonesia last increased the floor for its deposit facility rate to 4 percent on Aug. 10, from 3.75 percent.

Rupiah Gains

The rupiah gained 0.1 percent to 9,738 per dollar as of 5:04 p.m. in Jakarta, prices from local banks compiled by Bloomberg show. The currency fell 0.2 percent this week. Bank Indonesia will use its foreign-exchange reserves to keep the rupiah from weakening beyond 10,000 this year, Jahja Setiaatmadja, president director of PT Bank Central Asia, the largest lender by market value, said in an interview yesterday.

The spot rate traded at a 0.5 percent premium to its one-month non-deliverable forwards, which strengthened 0.3 percent to 9,789, data compiled by Bloomberg show. A daily fixing used to settle the derivatives was set at 9,756 by the Association of Banks in Singapore, from 9,752 yesterday and 9,719 on March 28.

One-month implied volatility for the rupiah, a measure of expected moves in the exchange rate used to price options, climbed six basis points, or 0.06 percentage point, to 6.01 percent today and rose 28 basis points this week.

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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