(Bloomberg) -- Indonesian sovereign bond bulls are betting that a rally will extend on looming interest-rate cuts as the country undergoes a change in government this month.
Manulife Investment Management, one of the biggest investors in rupiah bonds, is potentially looking to add to its holdings on expectations that the yield on 10-year notes may fall toward 6% from about 6.51%. Abrdn Plc also anticipates yields falling.
Global funds are returning to Indonesia, a bellwether for emerging markets, ahead of Prabowo Subianto taking over as president on Oct. 20. In all, investors snapped up $4.1 billion of Indonesian rupiah bonds last quarter — the biggest net inflow since March 2019 — after a long-awaited pivot to rate cuts by Bank Indonesia and the Federal Reserve.
The rally may only be at the beginning, with Indonesia’s central bank expected to keep cutting rates this year and the government undergoing a transition that could lead to buying opportunities for investors.
Abrdn, which is expecting two more rate cuts in Indonesia by the year-end, will be looking to buy if any transition-related volatility moves bond prices lower, said Jerome Tay, a Singapore-based investment manager at the firm. “I don’t think it’s just me,” he said. “People need to build back their positions.”
Concerns over the incoming government’s fiscal policies sparked a rupiah bond selloff in the middle of this year. Holdings by foreigners remain below 15% of total rupiah government bonds outstanding, according to Bloomberg compiled data, well below their pre-pandemic allocation.
But with the recent rally, the yield premium on the country’s benchmark 10-year over US Treasuries has narrowed to 272 basis points from more than 300 basis points since August, despite a decline in Treasury yields over that period, according to data compiled by Bloomberg.
The spread can “narrow further to its one-year average at 250 basis points should US soft landing scenario remain and weaker US dollar persist,” said Ezra Nazula, chief investment officer of fixed income at Manulife’s Indonesian unit. “As long as domestic fundamentals remain strong and global backdrop is supportive, we see opportunities to add at better levels when there is short-term volatility.”
Domestic conditions have contributed to the bonds’ gain. Inflation remains low, and growth is holding above 5%. The incoming government also has pledged to maintain legislated spending caps.
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The flows come as investors waited since at least March for the Fed’s signal to pile into Indonesian debt. The nation’s inflation-adjusted policy rate — the second highest in emerging Asia — offers plenty of scope for BI to ease policy.
What Bloomberg strategists say:
“Indonesia, India and the Philippines’ bond duration will outperform peers as policy rates and yields have more room to fall in the global risk-on environment.” - Marcus Wong, a strategist with Markets Live
To be sure, a rally in Indonesian bonds is also causing some managers to tactically shift their stance. UBS Asset Management has turned more neutral with a view that markets have priced rate cuts, said Shamaila Khan, head of the firm’s emerging market and Asia Pacific fixed income.
M&G Investment Management, one of the biggest investors in rupiah bonds, has been “reducing risk as valuations are now not as attractive,” said Eva Sun-Wai, a fund manager at M&G in London. She adds that she remains bullish on five to 10-year debt in anticipation of BI cuts.
“Front-end bond yields are likely to follow the BI rate,” she said.
--With assistance from Marcus Wong.
©2024 Bloomberg L.P.
