Indonesian sovereign debt beat all but two of its global peers in July, as a search for yield trumped concerns about the nation’s debt monetisation plan.
Rupiah securities gained 2.8% last month, the best performance after Slovenian and Peruvian debt among 47 markets tracked by Bloomberg. Policy easing, muted inflation and strong local demand buoyed Indonesian bonds, according to analysts.
The gains defied a slump in the rupiah and brought into sharp focus the global reach for yield sparked by a slide in developed-market interest rates. Inflows into Indonesian debt almost doubled in July, suggesting greater investor tolerance for the nation’s debt monetisation scheme than initially expected.
“The declining yields of major sovereigns is the anchor point,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. “It has allowed investors to put aside idiosyncratic concerns specific to Indonesia for now and focus only on the high yield.”
Bonds from Malaysia, Colombia and Italy were the other top performers in July. The returns were computed using Bloomberg Barclays and Intercontinental Exchange Inc indexes and include capital gains and coupon income.
They exclude fluctuations in exchange rates.
The gains in rupiah securities came on the heels of a warning that the debt-sharing plan could erode the central bank’s independence and trigger a sovereign-rating downgrade.
But 10-year bonds were unfazed, with yields falling almost 40 basis points in July to round off a fourth month of declines.
“Indonesia real yields are still among the highest in the investible EM local currency space and are projected to remain so,” said Philip McNicholas, Asean FX and rates strategist at Bloomberg Intelligence. “That ensures it retains plenty of interest.”
Rupiah bonds are a relatively high-beta market and will remain subject to swings in sentiment, said Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities in Singapore. Still, any selloff will be limited due to the lower foreign ownership level, he added.
Despite the outperformance by Indonesian bonds, worries persist that the debt-sharing plan could lead to unbridled borrowing by the government.
“The key risk is the current debt monetisation is extended to the next year or expanded more than now planned,” said Kiyong Seong, a rates strategist at Societe Generale SA in Hong Kong. “If it breaches the market anticipation, the side effect will be highlighted.”
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