Debt monetisation creeps closer in Asia, reshaping bonds

LONDON: Bank Indonesia is poised to buy sovereign bonds directly from the government, underscoring a massive shift that is playing out in Asia’s investment landscape.

From Jakarta to Wellington, policymakers are challenging taboos and creeping closer toward the monetisation of government debt, breaking new ground after the US and Europe took the lead in crisis management a decade ago.

Global bond funds say the bold action from the region’s central banks can’t come soon enough, even as they worry about the longer-term risks, particularly in emerging markets.

International investors hold almost one-third of Indonesia’s sovereign debt and rely on India for its high yields. Their stakes are larger still in Australia and New Zealand, where they own about half of all government bonds.

“We need to have an exit strategy sometime down the road, but right now we need aggressive policy reaction and most Asian policymakers have been delivering, ” said Jean-Charles Sambor, head of emerging-markets fixed-income at BNP Paribas Asset Management in London. “The issuance pipeline is more manageable in Asia than in other regions.”

As the coronavirus has spread from China to its neighbours and around the world this year, bond markets have been thrown into turmoil. Indonesia’s 10-year bond yield skyrocketed to 8.31% while yields on similarly-dated India securities have been buffeted as the government sells bonds at a break-neck pace to fund stimulus. Yields in Australia and New Zealand have whipsawed as traders come to grips with quantitative easing.

“As an investor it’s fascinating to see how quickly things are changing, ” said Neeraj Seth, head of Asian credit at BlackRock Inc in Singapore. “You really have to readjust your overall investment paradigm to match with that.”

Calculations by Bloomberg suggest that Bank Indonesia could end up holding 11% of the government’s debt, excluding bills, by the end of February next year, while the central banks of Australia and New Zealand are headed for 24% and 39%, respectively. The Reserve Bank of India looks poised to boost its ownership significantly from the present 15%.

The dangers lurking in these trends are already on display in Japan, where pioneering monetary policy makers have bought almost half the state’s colossal debt without reviving the nation’s economic fortunes.

Bank Indonesia (BI) broke the ice last week by purchasing Islamic bonds directly from the government at an auction and was expected to push further into unknown territory by purchasing regular sovereign debt at another auction yesterday.

The country’s finance ministry received bids for 44.4 trillion rupiah (US$2.9bil) of bonds and bills, according to people familiar with the matter. It wasn’t immediately known how much the central bank may have bid for.

BI’s purchases should boost market stability in the near term, according to Thu Ha Chow, a portfolio manager at Loomis Sayles Investments Asia in Singapore, which trimmed its Indonesia bond holdings earlier this year.

Foreign investors hold about 32% of the nation’s sovereign bonds, making them vulnerable to sharp moves when sentiment sours.

Chow said her concern is that risk premiums became distorted and global investors got crowded out by the central bank.

“Indonesia is effectively beginning to monetise their fiscal debt, ” said Edward Ng, a portfolio manager at Nikko Asset Management Asia Ltd in Singapore. “If left unsterilised and depending on the magnitude, (this) could lead to currency weakening and inflationary pressure at some point.” — Bloomberg

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