Photographer: Dimas Ardian/Bloomberg

Indonesian Bonds Eclipse Malaysia’s on Central Bank Tailwind

  • Bank Indonesia flags more rate cuts possible after six in 2016
  • Sentiment toward Malaysia damaged by 1MDB probes, Pioneer says

Indonesia’s bonds have returned three times as much as Malaysia’s this year as policy makers in Southeast Asia’s biggest economy embark on the longest easing cycle since the global financial crisis.

Government securities in Indonesia returned 18.2 percent in 2016, while Malaysia’s rose 5.8 percent, less than the regional average. Rupiah sovereign debt has drawn more than $8 billion of inflows, versus $4.8 billion for ringgit bonds. Aberdeen Asset Management Plc says it is still positive on Indonesian debt, while Pioneer Investment Management Ltd. says Malaysia sentiment has been hurt by probes into a state investment arm. 

The two Southeast Asian nations are commodity exporters with economies highly correlated to raw material prices. Yet Indonesia’s central bank has been able to cut interest rates six times, as its Malaysian counterpart has acted just once.

“Indonesian government bonds have just a bit more tailwinds going for them,” said Eugene Leow, a fixed-income strategist at DBS Group Holdings Ltd. in Singapore. “With growth still lackluster by Indonesia’s standards, there is considerable support for bonds. Malaysia’s absolute yields are not as high and Bank Negara Malaysia has not shown the same kind of enthusiasm for lower policy rates.”

The yield on Indonesia’s 10-year bonds has fallen 168 basis points this year to 7.07 percent as the central bank has lowered its benchmark interest rate six times and said more easing was possible. That’s the longest run of reductions since the central bank delivered nine straight rate cuts from December 2008 to August 2009.

Piling In

Global funds have also piled into Indonesian debt amid a positive perception of President Joko Widodo’s reforms. Widodo, elected in 2014, has introduced measures making it easier to do business and a tax amnesty which the government estimates will bring in as much as 165 trillion rupiah ($12.7 billion) in revenue. The rupiah has appreciated 6 percent this year even with the 150 basis points of rate cuts.

“With the rupiah remaining stable and volatility falling, fund inflows to Indonesia bonds are likely to continue,” said Takahide Irimura, an economist at Mitsubishi UFJ Kokusai Asset Management Co., which oversees about $120 billion. “Better-than-expected revenue from the tax amnesty program can also prevent the nation from increasing bond issuance.”

Indonesia’s 10-year bond yield dropped to 6.77 percent in August, the lowest level since 2013, before climbing back to their current level as global risk sentiment waned amid signs the Federal Reserve is moving closer to raising interest rates. Foreign ownership of Indonesian sovereign debt has dropped to 673 trillion rupiah from the peak of 686 trillion rupiah earlier this month.

‘More Cautious’

“Investors are not so much turning bearish on Indonesian debt, but are instead turning more cautious on risk assets given the upcoming global backdrop,” said Leong Lin-Jing, a Singapore-based investment manager at Aberdeen Asset Management Plc, which oversees about $400 billion globally. “We are still relatively positive on Indonesian bonds versus other lower yielding, more U.S. Treasury-like markets, such as Hong Kong and Singapore.”

Indonesian exports have fallen in all except one of the past 24 months amid weakness in the nation’s key commodity shipments. Inflation slowed to 3.07 percent in September, from as much as 8.4 percent at the end of 2014, allowing for stimulus to bolster an economy slowing in each of the past five years.

1MDB Scandal

While Malaysia’s central bank is also easing amid a crude oil slump, it said the case for another rate cut depends on economic data. Global funds trimmed holdings of the nation’s bonds for the first time in a year in September and the 10-year yield climbed this month to the highest since August.

Demand for ringgit bonds has also been hurt by the scandal over 1Malaysia Development Bhd, a state fund at the center of investigations in at least 10 countries. Both 1MDB and Prime Minister Najib Razak have denied any wrongdoing.

“Investor perception for Indonesia is far better than Malaysia,” said Hakan Aksoy, London-based portfolio manager of emerging markets at Pioneer Investment Management, which oversees about $250 billion. “In this yield hunt, Indonesia was one of the best performers. We still have our positive standing.”

— With assistance by Naoto Hosoda

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