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Indonesia’s Bonds Complete Biggest Weekly Advance Since March

Indonesian bonds gained this week, with the 10-year yield falling by the most since March, after the nation’s sukuk sale drew bids for 6.82 times the $1.5 billion on offer.

The yield on the government’s 8.375 percent conventional notes due March 2024 dropped 20 basis points, or 0.20 percentage point, from Aug. 29 to 7.96 percent, according to the Inter Dealer Market Association. That’s the steepest decline since the five days ended March 7. The yield lost six basis points today.

President-elect Joko Widodo may revise energy subsidies in October or November, his economic team member Arif Budimanta said Sept. 2. Raising fuel prices by 1,000 rupiah per liter in January would save 48 trillion rupiah ($4.1 billion), Finance Minister Chatib Basri said Sept. 3.

“The sooner they revise the subsidy the better,” said Herbie Mohede, fixed-income fund manager at PT Samuel Asset Management in Jakarta overseeing 2.5 trillion rupiah. “We’ve begun collecting the bonds whenever we see good value while we wait for a clearer plan on the fuel-subsidy issue to decide on fair entry levels.”

While a fuel-subsidy revision will ease the budget deficit, a 1,000 rupiah per liter rise in gasoline prices will add 1.5 percentage points to inflation, Minister Basri said. Consumer-price gains could reach 8.9 percent with a 3,000 rupiah increase, assuming the 4.4 percent inflation estimate in the 2015 budget, he said.

Provincial Bonds

Investor bids for the $1.5 billion of dollar Islamic notes sold this week were the highest for a Southeast Asian sovereign sukuk, said Robert Pakpahan, director general at the debt management office.

West Java plans to offer 4 trillion rupiah of bonds as soon as next month, which would make it the first province to sell debt independently from the government, Governor Ahmad Heryawan said yesterday. The proceeds will be used to build local projects including an airport near the provincial capital of Bandung, he said.

“We would be interested in the issuance provided the yield offered is good,” said Samuel Asset’s Mohede. “That the funds will go to infrastructure is a bonus.”

The rupiah dropped 0.5 percent this week to 11,755 per dollar, the most since the five days ended Aug. 8, according to prices from local banks. Indonesia’s financial markets were closed July 28 to Aug 1.

In the offshore market, one-month non-deliverable forwards dropped 0.2 percent to 11,818 per dollar, 0.5 percent weaker than the onshore rate, data compiled by Bloomberg show. The spot rate rose 0.1 percent today while the contracts were steady. The central bank set a fixing used to settle rupiah forwards at 11,770 per dollar, compared with 11,717 on Aug. 29.

Foreign reserves rose to $111.2 billion last month, the highest level since December 2012, from $110.5 billion, Bank Indonesia said in a statement posted on its website.

One-month implied volatility, a measure of expected swings in the exchange rate used to price options, climbed 15 basis points this week and 14 basis points today to 8.71 percent, data compiled by Bloomberg show.

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