An unexpected increase in Indonesia’s sovereign debt supply is exacerbating the country’s worst bond rout since the height of the pandemic, while making the asset class more sensitive to Treasury moves.
(Bloomberg) — An unexpected increase in Indonesia’s sovereign debt supply is exacerbating the country’s worst bond rout since the height of the pandemic, while making the asset class more sensitive to Treasury moves.
Indonesia’s bonds saw a third straight month of outflows amid the government’s plans to sell more than double the amount of debt this quarter than it did in the year-ago period. That’s after the nation’s 10-year yield jumped 54 basis points in September, the most since March 2020, as hawkish Federal Reserve bets spurred outflows from local assets.
The 30-day correlation between 10-year Indonesia bonds and similar-dated US yields has now risen to 0.42, from a 10-month low of -0.26 as of end July. That’s a signal that the two asset classes are more likely to move in tandem.
While Fed bets have turned more dovish this week in the wake of the Israel-Hamas conflict, traders still expect rates to stay higher for longer. That means Indonesia’s increased correlation with US rates may continue to weigh on rupiah bonds.
The expected increase in supply alongside expectations that the Fed will keep its policy tighter for longer “will keep Indonesian bonds on the backfoot as actual supply comes through in this environment,” said Lin Jing Leong, a senior EM sovereign analyst at Columbia Threadneedle Investments in Singapore.
That said, raising cash balances now may also mean reduced debt supply in the next quarter, she added.
Indonesia’s government is seeking to raise 168 trillion rupiah ($10.7 billion) in the fourth quarter versus 75 trillion rupiah raised in the last three months of 2022.
Supply Burden
Without favorable supply tailwinds, the pressure on Indonesia bonds from the ongoing selloff in global fixed income may get more apparent, Citigroup Inc strategists including Gaurav Garg wrote in a note last week. Indonesia’s 10-year yields will only turn attractive when they get closer to 7.4%, according to the note. That’s about 60 basis points higher from the current level.
The Indonesian government is appearing more tolerant of higher yields too, if recent auction results are anything to go by. The auction tail — defined as the gap between the highest and average bid yield — was wide, indicating that the government was eager to price the bonds despite low demand.
The 20-year auction tail stood at 19 basis points, the widest this year and above the year-to-date average tail of 2.3 basis points. Similar gauges for the 5-, 15- and 30-year debt were also the widest this year.
Global investors remain bearish over Indonesia’s bonds, having pulled $314 million so far this month after withdrawing $1.09 billion in September, the largest outflow since nearly a year.
Bank Indonesia announced last week that it was buying bonds in the market to “build confidence”. The purchases are unlikely to revive prices, but it may limit the selloff, said Vijay Kannan, a macro strategist at Societe Generale SA in Singapore.
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