Indonesia 10-Year Yield Drops to Three-Month Low on Fed Outlook

Indonesian bonds rose this week, pushing the 10-year yield to the lowest level in almost three months, as speculation the Federal Reserve will delay tapering stimulus drove inflows. Rupiah forwards strengthened.

Global funds have added 11.4 trillion rupiah ($1 billion) to local-currency sovereign debt holdings since the Fed unexpectedly refrained from reducing its $85 billion of monthly bond-buying on Sept. 19, finance ministry data show. The U.S. central bank should postpone tapering as data used to gauge the economy’s health were halted during the 16-day shutdown, Fed Bank of Chicago President Charles Evans said yesterday.

The yield on Indonesia’s 5.625 percent bonds due May 2023 dropped 52 basis points this week to 7.45 percent as of 4:03 p.m. in Jakarta, the lowest level since July 23, prices from the Inter Dealer Market Association show. The rate fell eight basis points, or 0.08 percentage point, today. The nation’s debt is Asia’s worst performer, having lost 11 percent this year, according to HSBC Holdings Plc indexes.

“Foreign fund flows are driving the rally on optimism Fed stimulus will continue,” said Handy Yunianto, the Jakarta-based head of fixed-income research at PT Mandiri Sekuritas, unit of the nation’s largest bank. “Indonesia’s bonds corrected by the most this year, so investors see good value in the yields.”

Forwards, Volatility

The nation’s 10-year bond yield is at a “manageable” level, while the currency’s onshore spot and offshore forwards rates have shown convergence, Deputy Finance Minister Bambang Brodjonegoro said in a statement in Jakarta today.

One-month non-deliverable forwards rose 0.7 percent this week and 0.1 percent today to 10,980 per dollar, data compiled by Bloomberg show. They reached 10,875 earlier today, the strongest level since Sept. 20, and were 3 percent stronger than the onshore spot rate, after trading as much as 6.6 percent weaker in August. The spot rate gained 0.5 percent this week and 0.2 percent today to 11,310 per dollar, according to prices from local banks.

A fixing used to settle the offshore forwards was set at 10,866 per dollar today, highest since Aug. 20, from 11,068 on Oct. 11, according to the Association of Banks in Singapore.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped 103 basis points this week to 14.18 percent, data compiled by Bloomberg show. The gauge fell 52 basis points today.

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