Indonesian bonds dropped this month, pushing the 10-year yield up the most since May, as the fastest inflation in Asia and a falling currency deterred investors.
Overseas investors sold a net 1.53 trillion rupiah ($113 million) of local sovereign securities this month, the first outflow since March, Finance Ministry data show. The rupiah fell for a third month and has lost more than 8 percent this year. Consumer-price gains probably stayed above 7 percent for a third month in July, according to analyst estimates before data due Aug. 3, and an intensifying El Nino-induced dry spell may cause crop harvests to fail, the climate agency warned.
“Further currency weakness remains a risk to the bond market,” said Nagaraj Kulkarni, senior Asia rates strategist at Standard Chartered Plc in Singapore. “El Nino and food prices remain risks to food-price inflation. I don’t think the market is responding to it right now.”
The yield on government notes due September 2026 rose 23 basis points in July to 8.56 percent, according to the Inter Dealer Market Association. It climbed 30 basis points this week and increased two basis points on Friday. The 10-year yield will drop to 8.3 percent by the end of this quarter and 8 percent by year-end, Kulkarni forecast.
The Finance Ministry signed a $1.17 billion standby loan from the World Bank, Asian Development Bank and Agence Francaise de Developpement, which can be used to cover the budget deficit in case of market volatility when the U.S. increases interest rates, Robert Pakpahan, director general at the budget financing and risk management office, said on Thursday.
The rupiah fell 0.5 percent on Friday to 13,531 a dollar after reaching 13,552, the weakest level since August 1998, prices from local banks show. The currency dropped 1.5 percent in July and its 8.5 percent decline this year is the worst performance in Asia after Malaysia’s ringgit.