Supercharged Indonesian bonds have all these reasons to rally

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SINGAPORE (Oct 21): Indonesia’s bonds have blown away their competitors this year and there are plenty of reasons to suggest they have room to keep rising.

The nation’s sovereign debt has returned 13% in 2019, outpacing the 6.1% gain of emerging-market government bonds as a whole, according to Bloomberg Barclays indexes. Indonesia’s securities have been boosted by central bank easing and an improving fiscal story, and gained despite the U.S.-China trade war.

Here are four reasons why the rally may still have legs:

1. Accommodative Monetary Policy
Bank Indonesia has already cut its benchmark rate three times this year but economists predict there is more to come. The central bank will lower its seven-day repurchase rate to 5% when it meets Thursday from the current 5.25%, according to 11 of 15 respondents to a Bloomberg survey as of 4 p.m. in Jakarta on Friday.

The one-month Jakarta interbank offered rate is hovering just 25 basis points above the policy rate, compared with a spread of 30 basis points the day before the previous rate cut on Sept 19.

Bank Indonesia has room to lower rates again as long as it’s able to maintain its inflation target, Deputy Governor Dody Budi Waluyo said last week.

2. Manageable Deficit
While President Joko Widodo has pledged to boost government spending to a record to bolster economic growth, he projected in August that the fiscal deficit would decline to 1.76% of gross domestic product next year, well below the self-mandated ceiling of 3%. The International Monetary Fund predicted the deficit would remain stable at 1.8% in its annual review of the Indonesian economy released in July.

3. Trade Upside
While Indonesian bonds escaped the worst of the emerging-market sell-off from escalating U.S.-China trade tensions, there’s some prospect they will benefit from any lessening in tensions. Indonesia’s 10-year yields have dropped 15 basis points this month as the U.S. and China pledged to keep working toward a comprehensive trade deal, following a round of talks in Washington that ended Oct 13.

4. Low Volatility
One factor that has deterred overseas investors from buying Indonesia bonds has been their high volatility. Ten-year yields surged to 9.90% in September 2015 from 7.02% earlier seven months earlier, as faltering Chinese growth spooked emerging-market assets. The prospect of a repeat has diminished as Bank Indonesia now regularly intervenes in currency and bond markets, and introduced onshore domestic non-deliverable forwards in late 2018.

One-month rupiah implied volatility dropped to 5.38% last week, compared with its five-year average of 8.44%, and as high as 17.8% in October 2015.

The combination of these positive factors is leading money managers such as Nikko Asset Management to label Indonesian bonds as among the most appealing in the region.

“We continue to be positive on Indonesia government bonds, as we believe that there is still room for further monetary policy easing,” said Edward Ng, portfolio manager at Nikko Asset in Singapore. “The real yields offered by Indonesia bonds makes Indonesia one of the most attractive markets within Asia.”