Indonesia Gets Caught in Crosshairs of Emerging Market Selloff

(Bloomberg) -- Indonesia’s market rout shows no signs of abating, with its two-year bonds the latest to be dumped in anticipation that the central bank may need to raise rates to defend its currency.

The yield on the two-year debt soared 34 basis points to a 10-month high of 6.73 percent as the currency weakened past the psychological 14,000 level on Monday. The stock index has tumbled to its lowest since August.

The selldown has Bank Indonesia caught between mounting pressure to raise rates and an economy that isn’t growing fast enough. An emerging market rout that started as U.S. Treasury yields touched a four-year high last month has hurt the Southeast Asia nation given its relatively open economy and the high foreign ownership of its assets.

“There seems to be an increase in market anxiety after the rupiah breached the 14,000 threshold,” said Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities Pte. in Singapore. “BI is expected to continue to take measures to stabilize the financial market, and raising rate is one of the tools at their disposal. The bond market may be pricing in such an eventuality.”

Indonesia Gets Caught in Crosshairs of Emerging Market Selloff

The rupiah fell 0.4 percent to 14,052 per dollar, after touching 14,053, the weakest since December 2015. The 10-year bond yield rose 10 basis points to 7.26 percent. Dollar bonds of Indonesia’s state-owned entities were sold off as well, with oil producer PT Pertamina’s 2044 notes down 1.9 cents to 106 cents at 4:34 p.m. in Jakarta.

At an auction Tuesday, the Finance Ministry turned down all 7.19 trillion rupiah ($511.7 million) of bids it received, rejecting the higher yields sought by investors. The government was looking to raise 17 trillion rupiah from the sale of bills and bonds with maturity going to 20 years.

Read: Indonesian High Yield Dollar Bonds Crushed by Rupiah Plunge

Foreign investors have sold a net $1.1 billion of sovereign bonds last month, on top of $2.7 billion of stocks this year, data compiled by Bloomberg show. Foreign investors hold around 38.4 percent of local-currency bonds.

"As global investors become more cognizant of rising U.S. rates and dollar strength, there would be pressures on EM yields including Indonesia," said Eugene Leow, a fixed-income strategist at DBS Group Holdings Ltd. in Singapore.

Bank Indonesia Governor Agus Martowardojo has said he will ensure ample liquidity of currencies to ease volatility, after repeated intervention on the rupiah. The central bank has also stepped up buying of sovereign bonds from the secondary market.

Not Alone

Indonesia isn’t alone in contending with investors who have turned cold. Debt sales from countries such as Russia have been canceled or postponed, while Argentina’s central bank has raised interest rates three times in a week to halt a currency slide.

“We just need to watch the rupiah by learning from the experience of Argentina,” Jeffrosenberg Tan, head of investment strategy at PT Sinarmas Sekuritas, said in Jakarta. “The stock market at this point is hoping for BI to raise the rates to stabilize the exchange rate.”

Indonesia’s benchmark index has dropped 9.1 percent this year, and is the second worst-performing major equity market in Asia. Any interest rate increase will also need to take into the consideration the sluggish economy. Growth in the first quarter at 5.06 percent missed estimates by economists.

©2018 Bloomberg L.P.