Biggest jump in Indonesia yield since 2012 signals rate hike

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SINGAPORE (Sept 5): The steepest surge in Indonesia’s two-year government bond yields since 2012 may be a sign that traders are betting on a hike in the policy rate before the central bank’s scheduled meeting at the end of this month.

The two-year yield soared 55 basis points on Tuesday, based on data compiled by Bloomberg. It rose one basis point to 7.65% on Wednesday. The Indonesian rupiah was near a psychological threshold of 15,000 per dollar after data showing South Africa’s economy fell into a recession exacerbated an emerging-market sell-off.

Bank Indonesia has been aggressive in defending the nation’s currency and bonds through interventions and has increased the benchmark rate by 125 basis points since mid-May. Governor Perry Warjiyo reiterated on Tuesday that the central bank will keep intervening, with its short-term focus on economic stability and the rupiah.

“Since Indonesia relies more heavily on external funding for its balance of payments, the rupiah is still the most vulnerable among Asian currencies when the dollar strengthens and EM risk sentiment deteriorates,” said Maximillian Lin, an emerging-markets Asia strategist at NatWest Markets in Singapore. “An off-cycle BI rate hike is possible to support the rupiah.”

Indonesian stocks plunged on Wednesday. The benchmark Jakarta Composite Index dropped 4.1% in a fifth day of declines, set for it’s biggest slump since August 2013.

The negative sentiment that investors have on the overall emerging-market space was behind the drop in Indonesian asset prices, while the country’s economic and corporate fundamentals remain robust, said Norico Gaman, head of research at PT BNI Sekuritas in Jakarta.

BI’s next scheduled policy decision is on Sept 27, a day after the Federal Reserve concludes its two-day meeting. Indonesia’s central bank lifted the rate at an out-of-cycle meeting on May 30.

An unscheduled meeting by the central bank can’t be ruled out, according to Marcus Wong, a strategist at CIMB Bank Bhd’s treasury department in Singapore.

“The spike in two-year yields this week has been led by a sell-off from onshore asset managers, which points toward an increasingly bearish onshore sentiment,” he said. “With the next BI meeting only scheduled for end-September, an off-cycle surprise meeting and hike would go some way in stemming this rout.”