Photographer: Dimas Ardian/Bloomberg

Indonesia's Rallying 8% Bonds Lure Funds in Negative-Rate World

  • Global funds pumped $5 billion into its debt in five months
  • ING sees 10-year yield dropping to 7% by year-end from 8.01%

Indonesia’s sovereign bonds are Asia’s best performers this year and strategists say global funds are still hungry for benchmark debt that yields 8 percent in a world of negative interest rates.

The yield on the 10-year 8.375 percent rupiah notes fell 80 basis points this year through Feb. 11 to a nine-month low of 7.95 percent before rising to 8.01 percent. ING Groep NV lowered its year-end yield forecast to 7 percent from 7.5 percent on Thursday on the prospect of more interest-rate cuts, while State Street Global Markets and Russell Investments are also bullish.

“The continued bias among developed-market central banks toward accommodative policies augurs well for Indonesian bonds to rally,” said Dwyfor Evans, a macro strategist at State Street Global Markets in Hong Kong.

Foreign funds have pumped almost $5 billion into Indonesian domestic bonds since the end of September as the rupiah rallied the most among emerging-market currencies and the Bank of Japan joined European monetary authorities in adopting negative interest rates. Bank Indonesia has lowered benchmark borrowing costs twice this year and while there is political pressure for it to cut more aggressively, the central bank is still seen as credible, according to Schroder Investment Management Ltd.

“We believe that the Bank Indonesia has a credible leadership team and will adjust monetary policy to deal with macroeconomic challenges,” said Manu George, the Singapore-based Asian fixed-income investment director at Schroder Investment, which oversees 313.5 billion pounds ($444 billion) globally.

President Joko Widodo said in an interview last month that he wanted the benchmark rate to “fall, fall, fall, fall and keep falling” after economic growth slowed to 4.79 percent last year, the least since 2009. Inflation has stayed below 5 percent since November after exceeding 7 percent earlier in 2015.

The central bank cuts its policy rate to 7 percent on Feb. 18 and ING said it sees it at 6 percent by the end of the year, compared with an earlier forecast of 6.5 percent. Of 23 economists surveyed by Bloomberg, nine predict a year-end rate of 6.75 percent, four project 6.5 percent and one sees 6.25 percent. The remaining nine expect it to be held at 7 percent.

The central bank may deliver “one or two more cuts for the rest of the year,” although it’s likely to stay on hold at its March 17 review after inflation quickened in the past two months, said Hakan Aksoy, a London-based bond fund manager at Pioneer Investment Management in London, which oversees 224 billion euros ($245 billion). Pioneer is “overweight” the rupiah and favors longer-tenor Indonesian notes, he said.

Inflation Contained

Rupiah sovereign bonds have gained 5.2 percent this year, a Bloomberg index shows, and the Indonesian currency has strengthened 5 percent. Thai notes are the next-best regional performers with a 4.3 percent advance. Debt from India, where the 10-year yield is 7.65 percent, are the only other securities from Asia’s major economies offering a comparable level of return to Indonesian paper.

“Seemingly contained inflation with attendant high real yields, and a central bank with an easing bias” have endeared Indonesian debt to investors this year, said Albert Jalso, a London-based senior portfolio manager at Russell Investments, which oversees $237 billion worldwide. “I don’t think it’s the end of the rally.”

More rate cuts may help to counter the impact of slowing global demand. Indonesian overseas shipments have fallen for 16 straight months amid sluggish prices for coal, palm oil and rubber. Domestic demand will improve in the second half and declining fuel costs will help contain inflation, Bank Indonesia Governor Agus Martowardojo said Jan. 27.

“The outperformance of Indonesian assets over the past several months has been one of the most striking developments in emerging markets and shows no signs of fading,” said Nicholas Spiro, a partner at London-based consultancy Lauressa Advisory Ltd., who sees another 50 basis points of rate cuts this year. “While Indonesian assets are proving remarkably resilient, the central bank can’t take this for granted given the plethora of risks in emerging markets.”

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