World-Beating Indonesian Bond Rally Falters on Virus Impact

(Bloomberg) -- Global funds are selling Indonesian sovereign bonds at the fastest pace in almost a decade, endangering a rally that had made the nation’s debt one of the world’s best performers.

Overseas investors cut holdings by a combined $1.94 billion in the past two weeks, the most since a similar period in September 2011, according to finance ministry data. The risk aversion that has swept emerging markets due to the coronarivus has also pushed down the rupiah from a two-year high.

“Concern of the economic impact from coronavirus is dominating sentiment,” said Jeffrosenberg Tan, head of investment strategy at PT Sinarmas Sekuritas in Jakarta. “They seem to be taking this opportunity to lock in gains from the recent rally and the strengthening rupiah.”

While Indonesia has yet to report any cases of the coronavirus, the shuttering of Chinese factories due the spreading outbreak will sap demand for local exports such as palm oil, coal and copper. China is Indonesia’s top export destination, with shipments last year reaching $28 billion.

The sell-down in Indonesian bonds illustrates how investors are becoming choosier over their emerging-market exposure. While the Southeast Asian nation is seeing outflows, foreign funds have been boosting purchases of South Korean debt.

Indonesian President Joko Widodo has called for government ministries to start spending to support Southeast Asia’s biggest economy as it tussled with the impact of the outbreak.

The outflow from Indonesia has reduced the foreign ownership of the nation’s sovereign debt to 38.1%, the lowest since June, according to data compiled by Bloomberg. The sales have been partly offset by purchases from Bank Indonesia and by local lenders, which have boosted their holdings by almost 190 trillion rupiah ($13.9 billion) this year.

Risk Reduction

“Bond outflows are likely to continue amid a reflexive reduction of risk, but the pace of outflows could be modest given Indonesia’s resilience to a Chinese slowdown,” said Chang Wei Liang, a macro strategist at DBS Group Holdings Ltd. in Singapore. “Bank Indonesia and domestic bank purchases could outweigh foreign selling, being attracted by a relatively steep yield curve.”

Indonesian government bonds outperformed all their Asian emerging-market peers in January, helped by more than $1.6 billion of purchases by the central bank.

Bank Indonesia’s support and optimism over the government’s economic program saw the benchmark 10-year yields drop to 6.56% Wednesday, from 8.90% in late 2018.

There’s little prospect of yields going much lower than current levels, according to Westpac Banking Corp.

“Given how much yields have fallen, any further leg lower is likely to lead to profit-taking flows, limiting the downside,” said Frances Cheung, head of Asia macro strategy at Westpac in Singapore. “The generally cautious risk sentiment is also keeping USD/IDR on the bid side, further limiting the downside to yields for now.”

--With assistance from Masaki Kondo.

To contact the reporters on this story: Chester Yung in Singapore at kyung33@bloomberg.net;Harry Suhartono in Jakarta at hsuhartono@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds

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