June 24 (Bloomberg) -- Indonesia’s bonds fell, pushing the 10-year yield to the highest level since September 2011, on concern inflation will quicken to the fastest pace in more than four years after the government raised subsidized fuel prices.
Gasoline and diesel prices were increased by 44 percent and 22 percent, respectively, Energy and Mineral Resources Minister Jero Wacik said late June 21. The government predicted inflation will reach 7.2 percent in its revised budget, which would be the most since April 2009, from an initial estimate of 4.9 percent, because of costlier fuel. Global funds pulled out 17.3 trillion rupiah ($1.7 billion) from local bonds this month, poised for the biggest outflow since September 2011.
The yield on the 5.625 percent notes due May 2023 rose 26 basis points, or 0.26 percentage point, to 7.21 percent as of 3:28 p.m. in Jakarta, the highest since Sept. 26, 2011, prices from the Inter Dealer Market Association show.
“Investors are pricing in expected inflation after the fuel adjustment,” said I Made Adi Saputra, a fixed-income analyst at PT Nusantara Capital Securities in Jakarta. “There is still potential for bond yields to keep rising beyond 7 percent due to external factors, which are hard to calculate.”
The cost of insuring the nation’s debt using five-year credit-default swaps fell 24 basis points to 243 on June 21 in New York, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That pared their gain this quarter to 80 basis points.
Indonesia’s credit rating may be raised if fuel reforms are finalized, Standard & Poor’s said in a May 2 statement as it cut the outlook to stable from positive.
“There is a likelihood that S&P may restore Indonesia’s outlook to positive after the fiscal improvement,” said Rully Nova, a currency analyst at PT Bank Himpunan Saudara 1906 in Jakarta. “Indonesia’s prospects are very positive now, but there are still external worries weighing on investor sentiment.”
S&P rates Indonesia at its highest junk level of BB+, the only one of the three major ratings companies not to assess the country as investment grade. The fuel-price increase is credit positive as it lowers subsidy costs and keeps the budget deficit below the legal limit of 3 percent, Moody’s Investors Service analysts led by Christian de Guzman in Singapore wrote in a report today.
The rupiah declined 0.1 percent to 9,935 per dollar, prices from local banks compiled by Bloomberg show. It touched 9,958 on June 18, the weakest level since 2009.
The spot rate traded at a 5 percent premium to its one-month non-deliverable forwards, which declined 0.9 percent to 10,461, data compiled by Bloomberg show. One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, rose 37 basis points to 16.02 percent, the data show.
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