Indonesia Yield Curve Steepest Since June on Fuel Subsidy Talk

The yield premium investors demand to hold Indonesia’s 10-year bonds over two-year notes reached a nine-month high on concern the government may reduce fuel subsidies, which would quicken inflation. The rupiah fell.

Managing the use of subsidized fuel is a priority and limits may be imposed on sales to privately owned vehicles, Finance Minister Agus Martowardojo said March 14. The government has no plan to raise fuel prices in April, Julian Aldrin Pasha, a spokesman for President Susilo Bambang Yudhoyono, said yesterday. Consumer prices rose 5.31 percent in February from a year earlier, the most since June 2011, official data show.

The gap between yields on the two- and 10-year bonds widened to 118 basis points as of 3:24 p.m. in Jakarta, compared with 115 yesterday, prices from the Inter Dealer Market Association show. That was the most since June 19, 2012. The yield on the government’s 11 percent notes due October 2014 fell three basis points, or 0.03 percentage point, to 4.29 percent, while the rate on debt due May 2023 was steady at 5.47 percent.

“Whether or not the government will adjust the subsidies is uncertain, which has turned investors cautious,” said I Made Adi Saputra, a fixed-income analyst at PT Nusantara Capital Securities in Jakarta. “The shorter-term notes will be preferred to guard against inflation. Yields on longer-term bonds may keep rising from here.”

The rupiah weakened 0.3 percent to 9,734 per dollar, prices from local banks show. It traded at a 0.4 percent premium to the one-month non-deliverable forwards, which fell 0.2 percent to 9,772, according to data compiled by Bloomberg.

A daily fixing used to settle the derivatives was set at 9,733 per dollar today by the Association of Banks in Singapore, compared with 9,705 yesterday.

One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, declined 12 basis points to 5.86 percent.

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