The nation’s 10-year yield has slid 28 basis points this month with Bank Indonesia buying up debt while supply has been crimped. Total bond returns rose to 1.6%, the highest among emerging-Asian nations.
That’s done little to whet global appetite for Indonesian bonds as record daily virus-related deaths and a slow vaccination rate threaten to drag out recovery.
The nation’s debt market is set to see its first monthly outflow in four months, while foreign participation at its latest auction fell to lowest since March.
“Foreigners likely stayed selective in Indonesian local-currency debt,” said Lawrence Lai, Asia rates and flow strategist at Standard Chartered Bank in Singapore.
“Concerns over a delay in Indonesia’s growth recovery due to the Covid delta variant continued to weigh on foreign sentiment.”
Foreigners made up about 7.6% of bids at a conventional rupiah bond auction last week, the lowest since March 3.
Overseas funds have sold about US$510mil (RM2.15bil) of bonds in July so far, according to Bloomberg-compiled data.
Foreign demand for Indonesian debt, a bellwether for emerging markets, has been falling since early last year as debt monetisation to fund pandemic relief efforts and concerns over the central bank’s independence eroded investor confidence.
Still, global funds hold nearly 23% of the outstanding sovereign bonds, among the highest in the region.
That makes local bonds vulnerable if any talk of the US Federal Reserve (Fed) tapering bond purchases down the line spurs volatility in global markets. The potential impact is likely to be amplified given a narrowing spread between US and Indonesian bonds.
The spread between 10-year rupiah bonds and similar Treasuries has dropped to about 500 basis points from an average of 610 basis points last year.
The risk of a sell-off in Indonesian debt is low for now as Fed chair Jerome Powell said Wednesday that the central bank is moving closer to when they can start tapering stimulus, but more economic progress is needed.
Market focus will now turn to Kansas City Fed’s annual policy retreat in Jackson Hole, Wyoming next month for further cues.
Falling back-end US yields have cushioned the blow of the delta variant for emerging-markets assets, which could also turn into a headwind if Treasury yields rise again, according to a Goldman Sachs Group Inc note last week. — Bloomberg