Indonesian bonds trounce Malaysian peers on fiscal divergence

Rupiah securities, on the other hand, are reeling in funds as fears about Indonesia’s debt monetization eases and yield-hungry investors return to emerging markets.

SINGAPORE: Indonesian bonds have long been more volatile than their Malaysian peers. They’re suddenly looking like the safer option.

Benchmark 10-year ringgit notes have underperformed rupiah securities, with the extra yield on Indonesia’s debt dropping to 312 basis points, near a three-year low.

Concerns about Malaysia’s fiscal deficit and the rising vulnerability of ringgit bonds to global swings have been a drag, with weak demand at recent auctions proof of waning appetite.

Malaysian bonds have suffered a setback as the latest round ofstimulus spending to curb infections threatens to worsen the budget shortfall and add to the supply of debt.

Rupiah securities, on the other hand, are reeling in funds as fears about Indonesia’s debt monetization eases and yield-hungry investors return to emerging markets.

“The 10-year Indonesia-Malaysia bond spread is akin to a proxy of the differential between emerging-market high yielders and low yielders, ” said Winson Phoon, head of fixed income research at Maybank Kim Eng Securities Pte in Singapore.

“It tends to widen during an emerging-market risk off when the low yielder shows better resilience, and vice versa.”

The spread could compress further, given the divergent outlook for the two markets.

Malaysia is reviewing its fiscal deficit and economic growth targets after the authorities unveiled a $9.7 billion stimulus program to mitigate the fallout from a two-week lockdown.

This comes after the government widened its target for the 2021 shortfall to 6% of gross domestic product from an earlier projection of5.4%.

In contrast, Indonesia has stuck to its budget deficit estimate of 5.7% of GDP which was announced last December. The plan is for the shortfall to drop below its pre-Covid cap of 3% by 2023.

The latest auction results are telling. A sale of 10-year benchmark ringgit bonds on Tuesday recorded a bid-to-cover ratio of 1.97 times, below the average 2.02 times seen for non-Islamic offerings this year.

On the same day, incoming bids at an Indonesian sale climbed, with global funds bidding for 19% of the total, the highest level of overseas demand this year.

Foreign Ownership

Lastly, Indonesian bonds also have this in their favor: yields are likely to remain well anchored. While investors are warming up to the securities again, foreign ownership has declined to 23% of the total outstanding from 39% at the start of last year.

The level has fallen as Bank Indonesia boosted its holdings to 23.2% as part of its debt purchase program.

In comparison, Malaysian bonds may have become more susceptible to swings in global markets after overseas investors boosted their ownership to 26% from 21% a year ago.

Bank Negara Malaysia owns just 1.3% of outstanding government securities, according to central bank data. - Bloomberg