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INDONESIA’S bond market is set to erase its outflows for the year as overseas investors pile into rupiah debt amid imminent interest-rate cuts by the Federal Reserve.
Global funds have bought almost US$1.1 billion of the nation’s government bonds this month, according to finance ministry data compiled by Bloomberg. That’s pared the net outflow from the debt market to just US$13 million for 2024.
Higher inflows have helped push down bond yields, resulting in reduced borrowing costs for the government. The yield on the benchmark 10-year security slipped to 6.69 per cent on Monday (Aug 19), the lowest level since April.
The inflows have also aided the rupiah. The currency has strengthened about 4.6 per cent against the US dollar in August, almost erasing this year’s declines.
Sentiment towards emerging-market assets has improved on bets the Fed will soon start cutting rates. Investors have also been lured to Indonesia’s debt due to the country’s robust growth and bets the Bank Indonesia (BI) may quickly follow the Fed in easing policy.
The extra yield on 10-year rupiah bonds over similar-maturity US Treasuries has started to narrow after widening to more than three percentage points this month, the most since May 2023.
“Emerging-market assets are enjoying the best of both worlds: a weaker US dollar and materially lower USD rates,” said Eugene Leow, a fixed-income strategist at DBS Bank in Singapore. Indonesian bonds “as a higher yielder and with BI likely to be more dovish would naturally be one of the key beneficiaries against this backdrop”, he said.
Indonesia’s bonds and currency had been under pressure earlier this year due to the Fed’s higher-for-longer mantra and concerns over the incoming government’s fiscal policies. These had led to net outflows totalling US$2.7 billion from the debt market in the first four months of the year.
“The immediate-term outlook does look enticing for IndoGBs,” DBS’s Leow said. “Foreign ownership is low given the challenging environment over the past two years and definitely have room to pick up.” BLOOMBERG
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