(Bloomberg) — Foreign investors are flooding into Indonesian government bonds, drawn by the new president’s signal of fiscal discipline and appetite for emerging market debt alternatives given U.S. election-related volatility.
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The country’s manageable inflation and the central bank’s surprise rate cut in September aimed at boosting growth also helped sustain demand. Offshore funds bought more rupiah bonds in October for the sixth straight month, marking the longest buying spree since 2017, according to data compiled by Bloomberg.
Prices of Indonesian government bonds fell in October after rising for five consecutive months, tracking the decline in U.S. Treasuries and global bonds, but did little to end a buying spree by foreign investors. Indonesia’s main bond index has returned about 5% since its rally began in early May, outperforming most Southeast Asian countries.
These inflows will help investors brace for uncertainty from the Federal Reserve’s interest rate path in a strong US economy and the prospect of a trade war after the November 5 election. This suggests that high yields remain attractive.
“Real yields remain attractive, making higher nominal yields even more attractive compared to regional peers,” said Philip McNicholas, Asia Sovereign Strategist at Robeco Group in Singapore. said. “Furthermore, the relative political stability and continuity that Indonesia exhibits sets it apart from other high-yield countries around the world.”
The new government’s maneuvers remain an important variable for Indonesian investors. President Prabowo Subianto’s decision to retain Finance Minister Sri Mulyani Indrawati in the new cabinet was widely seen as a sign of policy continuity and a conservative fiscal approach.
The government has since announced a budget deficit target below the legal limit, helping to allay concerns raised by Mr Prabowo when he touted some of his spending plans earlier this year.
“The continuity of reforms and relative US election buffers are stories that investors may want to buy, especially as US fiscal risks are perceived to be “Whether or not, it’s thwarting the endless optimism to buy into US carry.” At Mizuho Bank in Singapore. “So to speak, the ‘Indrawati trade’ is also positive from a fiscal perspective, all else being equal, and that provides support.”
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But there are signs that investor enthusiasm may not last, especially as the dollar and U.S. Treasury yields rise.
Demand for rupiah bonds in Tuesday’s preliminary auction fell to a one-year low, with 10-year bond yields at their highest level since August 1. Foreign investors reduced their holdings by $85 million last week, the first weekly net outflow since then. in July, according to data compiled by Bloomberg.
Aditya Sharma, emerging markets strategist at India’s NatWest Markets, said renewed hopes for the pace of the Fed’s rate cuts and a stronger dollar were likely to blame for the fall in Indonesian government bonds in October.
He also said that if the rupiah underperforms, there could be pressure on the bond market as Bank Indonesia may postpone further rate cuts to support the rupiah. The rupiah in October fell 3.6% to 15,713 rupiah to the dollar, the biggest monthly decline since March 2020.
Still, foreigners’ positioning in Indonesian government bonds is lower than historical averages, which could increase the premium over U.S. Treasuries and make Indonesian government bonds more attractive, Sharma said. “There is room for improvement in positioning.”
(Updates the movement of the rupiah in paragraph 12.)
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