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Indonesia Bonds, Stocks Fall on Concern Interest Rates Will Rise

Indonesia’s bonds declined, pushing the 10-year yield to the highest level since September 2011, while stocks sank the most in two weeks on concern the central bank will raise borrowing costs.

Bank Indonesia will strengthen its policy mix at a monthly board meeting on July 11 as a preemptive measure against accelerating inflation due to a June 22 increase in fuel prices, Governor Agus Martowardojo said in a statement on the monetary authority’s website yesterday. The central bank is likely indicating it will raise the floor for its deposit facility rate, or Fasbi, from the current 4.25 percent, Destry Damayanti, chief economist at PT Bank Mandiri, said today.

“They are signaling that they can be more aggressive in their tightening,” said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore. “Bank Indonesia hasn’t given details, but it is positive that they still have many instruments in their toolbox to manage inflation.”

The yield on the 5.625 percent notes due May 2023 climbed 10 basis points, or 0.1 percentage point, to 7.31 percent as of 4:02 p.m. in Jakarta, the highest level since Sept. 23, 2011, prices from the Inter Dealer Market Association show.

The Jakarta Composite index of stocks closed 3.2 percent lower, the most since June 20. PT Bank Central Asia was the second-biggest drag on the measure with a 5 percent slump. PT Bank Mandiri retreated 5.3 percent.

Concerns about higher interest rates are weighing on sentiment toward banks and property stocks, John Teja, a director at PT Ciptadana Securities said by phone today.

Broker Downgrade

A measure of construction, property and real estate companies in the Jakarta Composite slumped 4.5 percent, the most among nine industry groups. PT Bumi Serpong Damai fell 3.9 percent, while PT Lippo Karawaci sank 7.4 percent.

PT CIMB Securities Indonesia downgraded Indonesian stocks to neutral from overweight and lowered its year-end target for the Jakarta gauge to 5,075 from 5,250 previously, Erwan Teguh, the brokerage’s head of research, wrote in a report yesterday.

The Jakarta index has dropped 12 percent from its record close on May 20 as concern the U.S. Federal Reserve will start withdrawing stimulus prompted international investors to sell assets that had benefited from global money flows. The gauge has more than doubled in the past five years.

Indonesia’s finance ministry exceeded its target at a bond sale yesterday for the first time since May, raising 9.75 trillion rupiah ($976 million) compared with the 7 trillion-rupiah goal. The government sold 10-year bonds at a weighted average yield of 7.20 percent, according to Robert Pakpahan, director general at the debt management office.

The rupiah declined 0.1 percent to 9,940 per dollar, prices from local banks compiled by Bloomberg show. It traded at a 3.1 percent premium to its one-month non-deliverable forwards, which fell 1.5 percent to 10,260, according to data compiled by Bloomberg.

One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, dropped 29 basis points to 12.44 percent, according to data compiled by Bloomberg.

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