Indonesia Bonds Fall in Worst Quarter Since 2008 on Fund Outflow

Indonesia’s bonds completed the worst quarter since 2008 after foreign investors cut holdings of the nation’s debt on concern inflation will accelerate and the Federal Reserve will pare its stimulus.

Global funds reduced the proportion of local-currency government bonds they hold to 32.1 percent as of June 25, from a peak of 34.6 percent on May 16, finance ministry data show. The nation raised subsidized-fuel prices last week for the first time since 2008, which may quicken inflation to 7.2 percent this year from the government’s previous estimate of 4.9 percent.

The yield on the 5.625 percent notes due May 2023 surged 1.57 percentage points this quarter, the biggest increase since the three months ended June 2008, to 7.14 percent as of 4:26 p.m. in Jakarta, prices from the Inter Dealer Market Association show. It rose 1.16 percentage points this month and fell six basis points, or 0.06 percentage point, today.

“The era of yields of below 6 percent is probably over as it wouldn’t reflect the inflation picture,” said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore. “The upside for yields is limited while there is more room for downside as panic over the Fed’s tapering eases and investors reconsider the fundamentals.”

Bank Indonesia has bought more than 9 trillion rupiah ($906 million) of government bonds from the secondary market this month and is prepared to reenter the market to stabilize prices if necessary, Filianingsih Hendarta, executive director of monetary management, said yesterday.

Easing Outflows

Latest data show that outflows have started to ease while the rupiah is relatively stable, Peter Jacobs, director of communications at the central bank, said in Jakarta today. Bank Indonesia doesn’t peg the currency at a certain level or view $100 billion in foreign-exchange reserves as a psychological threshold, he said.

The currency declined 2.2 percent in the past three months, the most since the quarter ended June 2012, to 9,925 per dollar, prices from local banks compiled by Bloomberg show. It traded at a 2.3 percent premium to its one-month non-deliverable forwards, which fell 4 percent to 10,163, the biggest drop since the three months ended September 2011, data compiled by Bloomberg show.

One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, climbed 8.15 percentage points this quarter to 13.88 percent, according to data compiled by Bloomberg.

Before it's here, it's on the Bloomberg Terminal.