Indonesian Credit-Tied Note Sales Jump and Defy Market Sell-Off

Sales of credit-linked notes tied to Indonesia’s treasury bonds rose to the highest in five months as returns draw investors amid a stock slump and currency depreciation.

Issuance in April climbed to 1.33 trillion rupiah ($115 million), more than four times March’s total, according to data compiled by Bloomberg, as Moody’s Investors Service warned of a “market sell-off” that shows the government’s heavy reliance on external funding.

“The reason why investors are still attracted to Indonesia credit is on account of higher yields as well as expectations of improvement in the fundamentals of the economy,” Raghavan Rajagopalan, the global head of structuring in Singapore at Standard Chartered Plc, said in an e-mail on April 22.

The yield on Indonesia’s 10-year notes increased 10 basis points, or 0.1 percentage point, to 8.09 percent as of yesterday, the highest level since March 27, according to the Inter Dealer Market Association. The securities yielded 8.08 percent as of 10 a.m. in Jakarta. The economy grew 5.78 percent last year, the slowest pace since 2009.

The Jakarta Stock Exchange Composite Index fell 3.2 percent and the rupiah depreciated against the dollar the day after a parliamentary vote showed the frontrunner may have a slimmer lead than expected, possibly limiting his ability to carry out economic policy changes.

Election Concerns

“There was some noise last week on account of the forthcoming elections, but that is normal in most large economies,” Rajagopalan said. London-based Standard Chartered issued 1.23 trillion rupiah of the credit-linked notes this month, the data show.

The bank, which makes three-quarters of its profit in Asia, this month sold 755 billion rupiah of 10-year credit-linked notes with a coupon of 8.375 percent, according to data compiled by Bloomberg.

“Volatility in and of itself doesn’t cause a deterioration in Indonesia’s credit fundamentals,” Christian de Guzman, a sovereign analyst at Moody’s in Singapore, said in a phone interview on April 22. “Indonesia’s credit metrics stack up favorably against other similarly rated countries,” such as India and Turkey, in areas such as growth and level of debt, according to de Guzman.

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