Indonesian Bonds Seen Extending Rally On Rate-Cut Expectations
Samantha LuanIndonesian bonds have room to rally further, according to strategists, on expectations of further interest-rate cuts by the central bank.
Indonesian bonds have room to rally further, according to strategists, on expectations of further interest-rate cuts by the central bank.Nomura Holdings Inc. says the benchmark 10-year yield may slide to 5.75% by year-end from the current 6%. PT Sucor Sekuritas sees it falling to as low as 5.5%, citing signals from Bank Indonesia that there's room for further easing. The nation's largest local fund manager, PT Manulife Aset Manajemen Indonesia, also anticipates lower yields ahead.
"There's still some downward pressure on yields in the front end of the bond curve, mainly coming from BI easing expectations," said Nathan Sribalasundaram, rates strategist at Nomura. Over the past few months, they've shifted their focus slightly away from FX stability toward a more pro-growth stance, he said.The central bank held rates in October after three consecutive months of cuts, though Governor Perry Warjiyo said the room to ease remains open given low inflation projections and below-capacity domestic economic growth. Local-currency 10-year government bond yields have fallen since the end of March, but steadied after falling below 6% on Oct. 16.
Sri Mulyani Indrawati's replacement as finance minister with Purbaya Yudhi Sadewa worried some in the market that the government would boost spending and remove its state budget deficit ceiling. But his signals on keeping fiscal discipline are convincing some investors to give him the benefit of the doubt."The new finance minister, he's kind of said the right things as well so far," said Sribalasundaram, though he added that it appears Purbaya wants to push some fiscal boundaries as well. Still, he said "the main and the most important focus for the market is keeping this 3% fiscal ceiling for Indonesia, which for now seems to be kept in place at least for this year and next year for the budget."
However, not everything is set to help bonds gain. Foreign funds have been decreasing their holdings on concerns over domestic fiscal discipline and the central bank's independence. Offshore investors' ownership has declined to 13.7% of the total outstanding from 14% in September, when outflows hit a record high."Investors are still open to looking at Indonesian bonds and investing, but looking at with one eye on fiscal developments," said Mitul Kotecha, head of FX and emerging markets macro strategy at Barclays Plc.
Still, numerous factors are in place to help Indonesia's bond rally continue.
The expectation of Federal Reserve rate cuts is boosting sentiment, said Ahmad Mikail Zaini, Sucor's head of research. In the meantime, a rush of liquidity from the government's cash reserves placement in state-owned banks, as well as a lower outstanding amount of BI bills, will also push investors to long-end government bonds, he said.
