Indonesia bonds may gain more on dovish policy, fiscal outlook

[JAKARTA] Bank Indonesia’s (BI) dovish stance and easing concerns over the nation’s fiscal policy are fuelling expectation that government bonds will extend their rally into the second half of the year.

The benchmark 10-year yield, which stood at 6.6 per cent on Friday (Jul 11), may fall to as low as 5.8 per cent by year-end, local brokerage Sucor Sekuritas estimated. Aberdeen Group expects the five-year yield to fall well below 6 per cent.

Asian sovereign bonds, including Indonesia’s, have enjoyed a strong run this year as investors increasingly pivot away from US dollar assets. A sustained upswing in one of the largest emerging Asia bond markets would underscore how global investors, navigating Trump-era tariffs and geopolitical tensions, are moving more towards economies with improving fiscal outlooks and accommodative monetary policy.

“The prospect of further monetary easing provides a supportive backdrop for the bond market,” said Shier Lee Lim, macro strategist at Convera Singapore.

Indonesian bonds have returned over 5 per cent so far this year. Though they lag regional peers, they have climbed steadily, particularly starting in April, as government auctions draw robust demand.

Foreign investors have poured US$3.6 billion into government bonds on a net basis as at early July, driving the 10-year yield down more than 60 basis points since a March peak. Meanwhile, investors’ bids in most auctions since May were more than three times the sale targets, data compiled by Bloomberg shows.

BI governor Perry Warjiyo last month said the central bank will monitor the scope for an interest rate cut, depending on global conditions and rupiah stability. BI has lowered the rate by a total 50 basis points this year, with some analysts expecting another half-point cut this year.

Further helping the sentiment is the central bank’s moves to lower the yields on its short-term bills, known as SRBI, and redeem maturing bills to steer investors to sovereign debt. That coincides with US dollar weakness, which is expected to continue and may boost the rupiah, which would enhance local bonds’ appeal.

“We are unlikely to see longer-end yields revisit the highs last seen in March for the rest of the year”, if there are no negative fiscal surprises, said Audrey Ong, currency and emerging markets macro strategist at Barclays.

The government’s budget deficit for this year is expected to widen to 2.8 per cent of gross domestic product from its previous target of 2.5 per cent. But Finance Minister Sri Mulyani Indrawati calmed investors’ nerves when she said cash reserves will be used to plug the deficit in order to limit bond issuance this year.

“We see fair value of Indonesia 10-year government bond at roughly 6.5 per cent, which is basically neutral, but we are more bullish on shorter tenors,” said Fesa Wibawa, investment analyst at Aberdeen Group.  BLOOMBERG