(Bloomberg) -- Foreign investors are piling into Indonesian sovereign bonds, drawn by the new president’s signals for fiscal discipline and their appetite for emerging market alternatives given US election-related volatility.
The country’s manageable inflation and its central bank’s surprising September rate cut to spur growth also helped sustain demand. Offshore funds snapped up rupiah bonds for a sixth straight month in October, the longest buying spree since 2017, according to data compiled by Bloomberg.
Indonesian bonds’ price dip in October after five straight months of gains — as they tracked US Treasuries and a bond selloff worldwide — did little to stop foreign investors’ buying streak. A key Indonesian bond gauge has returned about 5% since the streak began at the start of May, outperforming most Southeast Asian peers.
The inflows suggest that high yields in more stable Asian emerging markets remain drawcards for investors gearing up for uncertainties from the Federal Reserve’s rate path in a robust US economy and the prospect of a trade war after the Nov. 5 election.
“Real yields remain attractive, adding to the allure of high nominal yields relative to regional peers,” said Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore. “Moreover, the relative political stability and continuity Indonesia is showing sets it apart from its high-yielding global peers.”
The new administration’s maneuvers remain key variables for Indonesia investors. President Prabowo Subianto’s decision to retain Finance Minister Sri Mulyani Indrawati in his new cabinet was widely seen as a signal of policy continuity and a conservative fiscal approach.
The government also has since announced a target deficit that is below the legal cap, helping to ease concerns that arose after Prabowo touted some of his spending plans earlier this year.
“The reform continuity and relative US elections buffer is a story that investors might be inclined to buy into, especially as US fiscal risks - perceived or otherwise - check unbridled optimism for buying into US carry,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “The ‘Indrawati trade’ so to speak is also a fiscal positive at the margin that is supportive, all else equal.”
But signs are emerging that investors’ zeal may not be sustained, particularly as the dollar and Treasury yields climb.
Demand for rupiah bonds at a primary auction on Tuesday fell to the lowest in a year, pushing yields on 10-year bonds to their highest since Aug. 1. Foreign investors trimmed their holdings by $85 million last week, the first weekly net outflow since July, according to data compiled by Bloomberg.
The repricing in expectations for the Fed’s pace of rate cuts and a stronger dollar are likely to blame for Indonesian government bonds’ decline in October, said Aditya Sharma, an emerging markets strategist at Natwest Markets in India.
Bond market pressures also may arise from Bank Indonesia possibly delaying further cuts to support the rupiah if the currency underperforms, he said. The rupiah weakened 3.6% to 15,713 per dollar in October, its biggest monthly drop since March 2020.
Still, foreigners’ positioning in Indonesian government bonds is low compared to the historical average, and premium offered over US Treasuries could rise and make the notes more attractive, Sharma noted. “There is scope for positioning to improve.”
(Updates with rupiah move in 12th paragraph.)
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