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(Bloomberg) — Foreign investors are setting the bar high when it comes to buying Indonesian bonds, as debt from other regions starts to look more attractive.
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Indonesia’s benchmark sovereign bond yields are expected to rise to 7. 5%, about 80 base issuances above where they are now, JPMorgan Asset Management and First Sentier Investors say. Brandywine Global Investment estimates that returns should possibly be at least three hundred base issues above. than their U. S. counterparts, compared to an existing distribution of around two hundred foundation issues.
This shows that investor confidence in Indonesian bonds, which were highly sought after among emerging market investors before Covid, is deteriorating due to currency weakness and low rate differential with the US. those in Latin America, which are reaping the benefits of accommodative financial policy and subdued inflation.
Investors can buy Brazilian bonds with yields higher than Indonesia’s as long as they can cope with greater fiscal and political uncertainties, said Desmond Soon, portfolio manager at Western Asset Management Co.
“Latin American countries are high-octane, high-yielding countries, and Asia is more of a mezzanine,” Singapore-based Soon said, adding that it also diverts some of its Indonesian fund’s exposure to peers such as India.
Apathy from foreign investors is dealing a blow to Bank Indonesia’s efforts to stabilize its currency after outflows of about $2. 5 billion in rupiah debt over the past three months, the largest in a year. The overall budget now represents less than 15% of Indonesia’s remarkable government. bonds, up from around 40% before Covid, according to data compiled through Bloomberg.
The central bank issued new securities to allow short-term yields to rise, hoping to attract more capital flows, and at the same time bought debt to boost market confidence, but to no avail.
“BI recently went back and bought bonds because it knows the market is crashing,” Carol Lye, a portfolio manager at Brandywine Global Investment Management, said last month. “On the genuine yield spectrum, Indonesia is doing well on its own, but when compared to the rest of the markets it shines less,” said Lye, who had been out of Indonesian sovereign bonds for a year.
The increased sensitivity of Indonesian bonds to Treasuries is also limiting rupiah bond yields. The yield on the 10-year U. S. note fell 35 basis points in November after the Federal Reserve indicated it was done raising rates. Indonesian yields for the same term also fell by roughly the same amount, to around 6. 7%.
Investors are now wondering if BI will tighten its policy further after markets unexpectedly hiked interest rates in October and left the door open for additional measures. Indonesia is in a much better position than some of its Asian peers when it comes to managing inflation, but it is not comparable to Latin America.
Price increases have been in line with the BI target since May, while the Philippines is at risk of missing its value target for the third year in a row in 2024. Price pressures most likely eased in Mexico, Chile and Colombia last month as Peru’s central bank prepares to cut its benchmark rate for a third direct meeting.
Indonesia will want to keep raising rates in this component of the cycle as U. S. rates remain elevated, said George Boubouras, head of research at hedge fund K2 Asset Management in Melbourne. “To attract foreign capital, you just have to raise rates more for a smart spread with U. S. Treasuries,” he said.
Is the tide turning?
Still, some investors, such as JPMorgan Asset Management, are more constructive about some Indonesian debt and warn that yields have yet to rise.
The bank has been buying rupee-denominated debt securities with a maturity of up to two years as it considers recovering and rolling over those maturities to offset any volatility in the U. S. Treasury. The fund had profited from a previous position in long-term bonds. Term debt in the middle of the year, as bonds rose 6. 5 percent, he said.
First Sentier Investors also bought two-year bonds and expects foreign investors to return because of the country’s fundamentals, said Nigel Foo, head of Asian constant income. “If those foreign investors come back, they will do so in gigantic numbers,” he said. saying.
–With those of Marcus Wong and Tania Chen.
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