Indonesia Two-Year Bond Yield Drops as Inflation Seen Quickening

Indonesia’s two-year bonds advanced, with the yield dropping by the most this year, amid speculation investors are favoring short-term notes on concern a plan to adjust fuel subsidies will spur inflation. The rupiah fell.

The government may need to raise the cost of subsidized fuel, with a 10 percent increase in April being the most feasible option, Bambang Brodjonegoro, head of fiscal policy at the finance ministry, said in an interview yesterday. Inflation, which reached a 22-month high of 5.9 percent in March, could accelerate to 8 percent if there is a price rise, Destry Damayanti, chief economist at PT Bank Mandiri, said yesterday.

“Investors seek safety in the shorter tenors as they are less sensitive to price gains,” said Herdi Wibowo, head of debt capital markets in Jakarta at PT BCA Sekuritas, a unit of the nation’s largest bank by market value. “The market has begun to price in expected inflation from the planned fuel adjustments.”

The yield on the government’s 11 percent bonds due October 2014 fell eight basis points to 4.33 percent as of 3:19 p.m. in Jakarta, the biggest drop since Dec. 21, according to prices from the Inter Dealer Market Association. The yield on the benchmark bonds due May 2023 was little changed at 5.52 percent.

Indonesia may sell a new type of subsidized fuel at 7,000 rupiah a liter, compared with the current variety sold at 4,500 rupiah per liter by state-owned PT Pertamina, Firmanzah, a senior staff member for economic affairs in the president’s office, said in Jakarta today. Like many Indonesians, he goes by only one name.

Rupiah, Volatility

The rupiah declined 0.2 percent to 9,762 per dollar, prices from local banks compiled by Bloomberg show. The 9,700 level may best reflect fundamentals, where the rate should promote exports and discourage unnecessary imports, the finance ministry’s Brodjonegoro said yesterday.

The spot rate traded at a 0.6 percent premium to the one-month non-deliverable forwards, which weakened 0.4 percent to 9,825, data compiled by Bloomberg show. A daily fixing used to settle the derivatives was set at 9,752 by the Association of Banks in Singapore, from 9,742 yesterday.

One-month implied volatility for the rupiah, a measure of expected moves in the exchange rate used to price options, dropped 16 basis points, or 0.16 percentage point, to 5.97 percent.

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