Indonesian Bonds Slide on Inflation Concern; Rupiah Strengthens

Indonesia’s bonds dropped, driving the 10-year yield to the highest level in almost five months, on concern the government’s plan to adjust fuel subsidies will quicken inflation. The rupiah advanced.

The government sold 7.65 trillion rupiah ($786 million) of bonds yesterday, with investors demanding rates as high as 6.28 percent for 15-year bonds, compared with 6.17 percent for the same debt in the secondary market on March 25. Finance Minister Agus Martowardojo, who parliament approved yesterday as the next central bank governor, said last week policy makers were considering measures to manage subsidized-fuel usage. Economists surveyed by Bloomberg forecast a fourth-quarter inflation rate of 5.33 percent, having predicted 5.10 percent in November.

“Uncertainty costs the capital markets greatly, since what they want is certainty so they can price in the right amount of risk,” said Herdi Wibowo, head of debt capital markets in Jakarta at PT BCA Sekuritas, a unit of the nation’s largest lender by market value. “Pressure on the rupiah has increased, while fuel subsidies are depleting foreign reserves.”

The yield on the 5.625 percent bonds due May 2023 climbed three basis points to 5.60 percent as of 3:45 p.m. in Jakarta, the highest level since Nov. 8, prices from the Inter Dealer Market Association show. The yield may climb as high as 5.8 percent in the first half, Wibowo said.

Sliding Reserves

Analysts cut their rupiah forecasts by the most among Southeast Asia’s emerging currencies since January as the nation’s foreign reserves fell $7.6 billion in the first two months of this year to $105.2 billion, driving away investors including Aberdeen Asset Management Plc.

“Foreign reserves reaching the $100 billion mark will cause more concern in the market and cause the rupiah to weaken further,” said Wibowo. “That will reduce Bank Indonesia’s scope to limit the currency’s weakness.”

The rupiah rose 0.1 percent to 9,722 per dollar, prices from local banks show. The spot rate was at a 0.5 percent premium to the one-month non-deliverable forwards which advanced 0.2 percent to 9,772, data compiled by Bloomberg show.

A daily fixing used to settle the derivatives was set at 9,730 by the Association of Banks in Singapore, compared with 9,753 yesterday. One-month implied volatility for the rupiah, a measure of expected moves in the exchange rate used to price options, rose 35 basis points, or 0.35 percentage point, to 5.89 percent.

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