Indonesia Bonds Gain on Speculation Fed Tapering Will Be Delayed

Indonesia’s bonds rose, pushing the 10-year yield to a two-month low, on speculation a continuing U.S. budget impasse increases the chance the Federal Reserve will delay tapering stimulus that has buoyed emerging markets.

The rupiah gained last week by the most since January 2012 as global funds added 2.61 trillion rupiah ($233 million) to rupiah sovereign debt holdings in the first four days of the week, finance ministry data show. U.S. Senate leaders are resuming talks before the nation’s borrowing authority lapses tomorrow. The Fed unexpectedly refrained from reducing its $85 billion of monthly bond purchases in September.

The yield on the government’s 5.625 percent bonds due May 2023 dropped 12 basis points, or 0.12 percentage point, from Oct. 11 to 7.85 percent as of 4:21 p.m. in Jakarta, the lowest level since Aug. 14, according to prices from the Inter Dealer Market Association. Local financial markets were closed on Oct. 14 and Oct. 15 for public holidays.

“There’s optimism the Fed will further delay its tapering plans due to the continuing debt ceiling debate,” said Rully Nova, a currency analyst at PT Bank Himpunan Saudara 1906 in Jakarta. “The market isn’t concerned about a U.S. default as they will probably push back the debt talks while still meeting payments.”

The rupiah was steady from Oct. 11 at 11,365 per dollar after touching 11,301 earlier, the strongest level since Sept. 20, prices from local banks show. One-month non-deliverable forwards fell 0.7 percent to 11,087 per dollar, 2.5 percent stronger than the spot rate, data compiled by Bloomberg show. A fixing used to settle the offshore forwards was set at 10,995 per dollar today, from 11,068 on Oct. 11, according to the Association of Banks in Singapore.

Current Account

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed five basis points to 15.07 percent, data compiled by Bloomberg show.

Indonesia’s current-account deficit may be 2.5 percent of gross domestic product next year, Gundy Cahyadi, an economist at DBS Group Holdings Ltd. in Singapore, wrote in an Oct. 11 research note. That compares with the central bank’s estimate of 3.4 percent for this year and the record 4.4 percent shortfall in the second quarter.

“With the external balance picture improving and prompting yield-seeking inflows, there is room for the rupiah to strengthen to 10,000 by the end of the year,” Bank Himpunan Saudara’s Nova said.

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