Indonesia’s benchmark yield falls to lowest in almost two years

[JAKARTA] Indonesia’s 10-year bond yield fell to the lowest level since September 2023 due to rising interest-rate cuts expectations, overseas inflows and a soft US dollar.

The benchmark yield slipped three basis points on Friday (Aug 8) to 6.42 per cent, extending its decline from a high in January to almost 90 basis points.

Emerging Asian sovereign bonds, including Indonesia’s, have rallied this year as global funds diversified their investments away from US dollar assets. July’s weaker-than-expected US payroll data boosted bets that the US Federal Reserve will cut rates at its September meeting, improving sentiment towards bonds and weighing on the greenback.

“Monetary policy settings in Indonesia have consistently been on the tight side as Bank Indonesia grapples with the foreign exchange management component of its mandate,” said Philip McNicholas, Asia sovereign strategist at Robeco in Singapore. “With the US dollar embarking on a secular decline, that should allow for a more domestically supportive policy stance via rate cuts and should support some downward pressure on yields overall.”

Expectations that Bank Indonesia will deliver more policy easing this year has also helped fuel the rally in local bonds. Improving sentiment towards the nation’s finances also bolstered demand, after Finance Minister Sri Mulyani Indrawati pledged to keep the state budget deficit at below 3 per cent of gross domestic product and to use cash reserves to plug this year’s shortfall.

Overseas investors have bought about US$3.5 billion of Indonesian government bonds this year, already surpassing last year’s total inflows.

“Global local-currency-investor positioning is relatively light in Indonesia, especially versus other high-yielding markets,” Robeco’s McNicholas said. “Moving back towards more historically normal positions in Indonesia is likely supportive for the government bonds, pushing yields lower still.” BLOOMBERG