Indonesian bonds seen extending rally on rate-cut expectations

[JAKARTA] Indonesian bonds have room to rally further, according to strategists, on expectations of further interest-rate cuts by the central bank.

Nomura Holdings says the benchmark 10-year yield may slide to 5.75 per cent by year-end from the current 6 per cent. Sucor Sekuritas sees it falling to as low as 5.5 per cent, citing signals from Bank Indonesia (BI) that there’s room for further easing. The nation’s largest local fund manager, 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 have shifted their focus slightly away from FX stability towards 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 per cent 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 per cent 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 per cent of the total outstanding from 14 per cent in September, when outflows hit a record high.

“Investors are still open to looking at Indonesian bonds and investing, but looking at it with one eye on fiscal developments,” said Mitul Kotecha, head of FX and emerging markets macro strategy at Barclays.

Still, numerous factors are in place to help Indonesia’s bond rally continue.

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The expectation of US 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. BLOOMBERG