Indonesian Short-Term Bonds Rally as Inflation Seen Quickening

Indonesia’s short-term bonds rallied, pushing the two-year yield to a one-year low, on speculation investors are favoring the notes to guard against accelerating inflation. Rupiah forwards declined.

Consumer prices will increase 5.2 percent this year from 4.3 percent in 2012, according to the median estimate of 22 analysts surveyed by Bloomberg, as the government raises electricity tariffs by 15 percent. Global funds added 2.07 trillion rupiah ($213 million) to their local-currency sovereign debt holdings in the first two days of this week, finance ministry data show.

“Price swings on the shorter end are more manageable when inflation quickens,” said Herdi Wibowo, Jakarta-based head of debt capital markets at PT BCA Sekuritas, a unit of the nation’s largest bank by market value. “It is likely that the two-year yield can set a new record low as foreign holdings continue to rise.”

The yield on the government’s 11 percent bonds due October 2014 dropped two basis points, or 0.02 percentage point, to 4.32 percent, the lowest level since Feb. 22, 2012, according to closing prices from the Inter Dealer Market Association. Benchmark two-year securities reached a record-low of 4.18 percent on Feb. 15, 2012. The yield on the 6.125 percent notes due May 2028 was steady at 5.96 percent.

The rupiah’s one-month non-deliverable forwards weakened 0.5 percent to 9,740 per dollar as of 4:15 p.m. in Jakarta, data compiled by Bloomberg show. They traded at a 0.4 percent discount to the spot rate, which declined 0.2 percent to 9,702, according to prices from local banks. A daily fixing used to settle the derivative contracts was set at 9,703 today, compared with 9,704 yesterday, according to the Association of Banks in Singapore.

One-month implied volatility for the rupiah, which measures expected moves in exchange rates used to price options, was unchanged at 6.5 percent.