Aditya Suharmoko and Abdul Khalik, Jakarta – Following a swift decision by the government Friday to buy back the first lot of Rp 2 trillion (US$217 million) worth of bonds, government bonds eased after soaring to their highest point in 2.5 years, calming turmoil in the country's debt market.
Rahmat Waluyanto, the Finance Ministry's director general of debt management, said 30 minutes after announcing the buyback plan, the yield of bonds improved by 5-10 basis points and had gradually declined to a feasible benchmark.
"This is part of our commitment to ensuring stability in the government bond market," he said.
In the near future, the government, he said, would make regular repurchases of bonds to maintain their yield, as well as issuing new bonds with assorted rates and shorter maturity, which are expected to be less risky.
On Thursday, market panic triggered an increase in government bond yield. The yield from the 20-year FR0047 bond, one of the market benchmarks, reached 12.58 percent, up from 10.92 percent on Feb. 29.
Over the last couple of days, investors have jumped on the bandwagon to dump government bonds due to a concern, among others, that accelerating inflation would undermine economic growth.
The projected swelling of the state budget deficit from increasing fuel subsidies, following higher global oil prices, was another concern.
The widening deficit will force the government to flood the market with more bonds to compensate for the shortfall, a move which will raise the risk on bonds since investors will demand a higher yield.
The government estimated a budget deficit of 2.1 percent of gross domestic product in 2008. So far, the government has sold bonds worth Rp 47.3 trillion from the planned Rp 117 trillion for this year.
Finance Minister Sri Mulyani Indrawati said the government would continue to monitor bond prices and was ready to take immediate measures if necessary.
The ministry plans to launch treasury bills between April22 and 29, and in the month after that. Zero-rate and floating-rate bonds are also set to hit the market this month.
In August, the ministry expects to launch sharia bonds after the endorsement of an Islamic bonds bill, which is still being deliberated by lawmakers.
Bank Indonesia Governor Burhanuddin Abdullah is concerned by the declining value of government bonds.
"We will carefully monitor the trend, as it will negatively affect the banking system," he said.
Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa agreed with the government's buyback decision, saying the policy would boost investor confidence. "It seems the market has recovered from panic," he said.