Marcus Wong with assistance from Claire Jiao, reporting from Bloomberg, write that Indonesian rupiah bonds have been boosted by a potential U.S. recession and Fed interest-rate cuts.
They write that this saw global funds snap up USD 3.5-billion of Indonesian debt last quarter, the most in four years, according to data compiled by Bloomberg. Investors are buying rupiah bonds for other reasons too, including slower inflation and signs local policymakers have finished their own tightening cycle.
“We are constructive on the rupiah-government-bond outlook,” said Jennifer Kusuma, a senior Asia rates strategist at Australia & New Zealand Banking Group Ltd. in Singapore. Domestic bond demand is sufficient to absorb supply, the inflation outlook is benign, and the comfortable fiscal position means there’s downside potential to the bond-supply target, she said.
According to Bloomberg indexes, Indonesia’s bonds have already returned 7.3-percent this year, the best performance in emerging Asia after the Philippines. A broader gauge of Asian sovereign debt has gained just 1.9-percent.
One of the major positives for Indonesian bonds is the path of inflation. An annual gauge of core consumer prices dropped to 2.94-percent in March, below the middle of the central bank’s 2-percent to 4-percent inflation target for the first time since July.
At the same time, headline inflation slid to 4.97-percent from 5.47-percent, helping make Indonesia’s 10-year inflation-adjusted yield — currently around 1.73-percent — the fourth highest of 13-major emerging-market economies.
While bond inflows have been rising across Asia, those into Indonesia stand out. Net purchases in the first quarter came in at nearly 1 standard deviation above the 10-year average, the highest in the region, say Bloomberg.
With the US and Indonesian central banks seen approaching the end of their respective hiking cycles, inflows looking for higher carry returns are likely to keep increasing in the second quarter, said Duncan Tan, a strategist at DBS Bank Ltd. in Singapore.
Even with the bumper inflows, overall positioning remains light. Global funds only own 15-percent of Indonesia’s outstanding sovereign bonds, down from 39-percent before the global outbreak of the pandemic in early 2020. That leaves plenty of room for money managers to boost holdings.
The outlook for a stronger rupiah is also helping to encourage inflows. The currency is set to gain from higher oil prices — especially following OPEC+’s decision to trim output.
Bank Indonesia’s efforts to increase its dollar reserves through its new term-deposit facility is another potential rupiah tailwind. Investors are putting money into the three-month facility, instead of just the one-month tenor, a sign of growing confidence in the central bank’s facility, say Bloomberg.
NatWest Markets favours shorting dollar-rupiah one-month non-deliverable forwards with a target of 14,000, strategist Galvin Chia in Singapore wrote in a research note Friday.