Mandiri Sees Indonesian Bond Rally Reversing on Slow Spending

A rally in Indonesian bonds is coming to an end as slow state spending weighs on the country’s economic growth prospects, according to PT Mandiri Sekuritas.

The yield on the 10-year sovereign notes -- at 8.25 percent as of 11:04 a.m. in Jakarta, according to the Inter Dealer Market Association -- will start rising toward 8.4 percent, said Handy Yunianto, who manages fixed-income sales at Mandiri Sekuritas. The 10-year yield has fallen 40 basis points in the three weeks through Friday.

The government may only achieve 55 percent of its capital expenditure target this year and the economy will probably expand less than 5 percent in the second quarter, DBS Group Holdings Ltd. analysts wrote in a note on Friday. Gross domestic product increased 4.71 percent in the three months through March, the least since 2009. Foreign funds pulled 3.23 trillion rupiah ($243 million) from local-currency sovereign debt in the first three days of the week, the latest data show, after five straight weeks of inflows.

“Unlike in developed economies, slowing growth is bad for Indonesian bonds,” said Yunianto at Mandiri Sekuritas, a unit of the country’s biggest lender by assets. “Growth prospects remain weak. The economy’s banking on state spending picking up but the signs haven’t been encouraging.”

The government had spent 35 percent of its annual budget as of June 25, Finance Minister Bambang Brodjonegoro said on Thursday. Value-added tax collection worsened going into June, suggesting that growth slowed from the first quarter, Deutsche Bank AG analysts wrote in a note dated June 25.

In an attempt to spur credit expansion, Bank Indonesia will loosen reserve rules for lenders from Aug. 1, broadening the definition of deposits by including securities issued by the banks, it said in a statement late on Thursday.