Dovish Fed Leaves Indonesian Bonds With Fewer Hurdles Than Peers


Indonesian sovereign bonds are better placed for gains compared with Southeast Asian peers as concerns about the Federal Reserve’s stimulus tapering subside.   

The risk of a selloff in emerging markets due to a potential Fed tapering has faded as the event is largely priced in. Fed Chairman Jerome Powell’s dovish comments at Jackson Hole in late August have also put any immediate U.S. tightening bets on the back-burner. This has cleared up a macro risk for Southeast Asian debt particularly Indonesia, whose bonds were the hardest hit when the Fed unexpectedly announced plans to roll back stimulus in 2013. 

“Sources of risks for the Indonesian bond market have diminished between now and the year-end,” said Jennifer Kusuma, Singapore-based senior strategist for Asia rates at Australia & New Zealand Banking Group Ltd. 

Dovish Fed Leaves Indonesian Bonds With Fewer Hurdles Than Peers

Domestic tailwinds are providing a further boost to Indonesian debt. “The central bank’s “burden-sharing” program, reduction in domestic bond supply and the flush liquidity outlook, have taken away many of the uncertainties from the supply-demand outlook,” Kusuma said.

The reduction in bond issuance has already taken effect. The government on Thursday announced plans to sell 21 trillion rupiah ($1.5 billion) of bonds on Sept. 14, lower than the average issuance target of 32 trillion rupiah in the first seven months of the year.

All these factors have helped lift Indonesia’s sovereign bond returns to 5% this quarter, the most among Southeast Asian nations. Malaysia’s bonds had the second-highest return of 0.9%. 

Rupiah bonds benefit from global fund flows more than peers due to their relatively large holdings among foreign investors and the potential for carry trade as a result of their higher yields. Global funds bought $1.3 billion of Indonesian bonds since August after $576 million of outflow in July. 

Meanwhile, domestic factors are damping prospects for other major bond markets in the region.


Thailand’s bonds have posted a loss of 0.9% this quarter as easing virus-led lockdowns brighten growth prospects and reduce demand for the safe-haven debt. The notes are also weighed by supply risk amid discussions to raise the nation’s public debt ceiling to fund Covid relief efforts. The demand for bonds is likely to fall further amid plans to reopen Bangkok and key tourism spots to foreign visitors and falling odds of a rate cut.


Philippine bonds have been emerging Asia’s worst performers since June due to inflation as well as supply concerns. August inflation surged to 4.9%, the highest this year due to a surprise jump in food prices. The threat of a reduction in central bank bond purchases also lingers as the governor signaled that the Bangko Sentral ng Pilipinas will continue to slow purchases of government bonds for the rest of the year.


The 2022 budget announcement due in October will be the headline risk event for the ringgit bonds. The budget announcement will include next year’s fiscal deficit targets as well as an update on raising the existing debt ceiling level of 60%. Markets will also be cautious of an overly-optimistic figure, after this year’s budget shortfall target was revised twice.

©2021 Bloomberg L.P.

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