Marcus Wong and Ruth Carson – The massive foreign inflow into Indonesian bonds this month may extend, if investor positioning is anything to go by.
Global funds have poured $2.2 billion into Indonesian sovereign bonds in August, the most since January 2023. Still, foreign fund holdings of Indonesian debt remains below historical levels, even compared with its regional peers.
Emerging market funds are rushing to buy Asian bonds as the prospect of a Federal Reserve rate cut next month raises their appeal over US Treasuries and their strengthening currencies provide a further upside. For Indonesian debt, improving government finances and higher returns have been an added draw.
Mark Nash, who runs an absolute return bond strategy at Jupiter Asset Management in London said he's been buying Indonesia's 10-year rupiah denominated sovereign bonds. "If the dollar is no longer so dominant then it should be easier and cheaper for emerging markets to fund – including Indonesia," he said.
Global funds hold 14.4% of Indonesia's outstanding domestic government bonds, down from the 15.4% a year ago, and considerably below 39% before the Covid-19 pandemic in early 2020. Compared with regional peers, Indonesian bonds still have seen a net foreign outflow of $9.3 billion since March 2020, while Thailand and Malaysia have had about $13 billion of inflows each.
"EM local bond investors are likely still underweight Indonesian bonds versus the index, and have significant room to rebuild risk if conditions" warrant it, such as from a further drop in US rates, Goldman Sachs Group Inc. strategists including Kamakshya Trivedi and Danny Suwanapruti wrote in a note on Friday.
This optimism over Indonesian bonds has become evident at bond offerings, especially after President Joko Widodo announced in August a 2025 budget deficit target of 2.53% of gross domestic product, which is lower than the latest estimate of a 2.7% deficit for this year and well below the 3% legal cap.
A conventional bond sale on August 21 received cumulative bids of 104 trillion rupiah ($6.7 billion), the highest since the August 2021 auction. The government this week also sold a 40-year rupiah bond for the first time via private placement, and it now plans to offer it at regular auctions.
Dollar bond demand
The demand for Indonesia's dollar bonds has also been strong. The average yield spread of such debt over Treasuries fell to 73 basis points on Tuesday, the lowest since June 10.
Now debt issuance is picking up across the region as investors seek to cash in on the upbeat momentum.
The Philippines started marketing its second dollar bond offering this year on Wednesday as is looks to price a three-tranche deal. It has set the initial price on the longest portion of 25 years at 5.5%, according to people familiar with the matter who asked not to be identified. The 25-year note is also classified as sustainable, the people said.
Buying interest for Indonesia's bonds may increase as they continue to deliver outsized returns. A Bloomberg index of Indonesian notes offered returns of 6.7% to unhedged dollar-based investors in August, the highest in emerging Asia. In the first seven months of the year, rupiah bond returns lagged all emerging Asian peers except for South Korea and Taiwan.
Investors were spooked in June on earlier reports that the incoming administration under Prabowo Subianto, which officially takes over in October, was seeking to eventually increase the debt-to-GDP ratio toward 50% to support its pre-election manifestos. Officials have since then pledged fiscal continuity.
"Our allocation to Indonesian local-currency government bonds is slightly overweight relative to our EM local-currency holdings," said Rajeev De Mello, chief investment officer at Gama Asset Management SA. "Greater clarity around the country's budget and debt strategy will be crucial in determining future allocations," he added.
– With assistance from Ameya Karve and Harry Suhartono.