Indonesian Yield Spread Shrinks as Fuel Policy Concern Recedes

The difference in yield between Indonesia’s two- and 10-year bonds narrowed to the least since February after the government spelled out its plans for fuel subsidies, easing concerns about inflation.

Coordinating Minister for the Economy Hatta Rajasa said April 30 the government intends to raise the subsidized fuel price to 6,000 rupiah a liter, from 4,500 rupiah. Such a move will benefit the balance of payments and the rupiah, Bank Indonesia Governor Darmin Nasution said last week. Global funds added 2 trillion rupiah ($205 million) to their sovereign debt holdings this month through May 8, finance ministry data show.

“With more certainty on the fuel-policy adjustment, there is less investor concern over potential inflation,” said Nurul Eti Nurbaeti, head of treasury research at PT Bank Negara Indonesia in Jakarta. “The rupiah has found stability near this range, which also boosts confidence.”

The yield spread shrank 20 basis points this month to 95 in Jakarta, the least since Feb. 25, according to prices from the Inter Dealer Market Association. It was as high as 121 as recently as May 2. The rate on 10-year notes dropped six basis points this month to 5.44 percent, the lowest since March 13.

Consumer prices rose 5.57 percent last month from a year earlier, slowing from a 22-month high of 5.9 percent in March, official data showed May 1. Bank Indonesia meets on interest rates tomorrow, with all 21 economists surveyed by Bloomberg predicting the reference rate will be left at 5.75 percent.

The rupiah weakened 0.1 percent to 9,740 per dollar as of 10:32 a.m. in Jakarta, prices from local banks compiled by Bloomberg show, 0.3 percent stronger than 9,769 on one-month non-deliverable forwards. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 13 basis points, or 0.13 percentage point, to 5.89 percent.

A daily fixing used to settle the derivatives was set at 9,741 today, compared with 9,738 on May 10 by the Association of Banks in Singapore.

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