Indonesia Embraces Higher Borrowing Costs to Sell More Bonds

(Bloomberg) -- Indonesia offered higher yields to sell the most bonds in two months, testing appetite for emerging-market assets as the government continues to build up a buffer for stimulus spending.

The finance ministry sold 21.68 trillion rupiah ($1.48 billion) of non-Islamic debt, excluding T-bills on Tuesday. That’s the biggest since the sale in mid-February and compared with just 3.75 trillion rupiah at the previous conventional debt auction two weeks ago. The larger amount sold saw the bid-to-cover ratio plunge to 1.86, the lowest in a year.

“Domestic yields are still more than 100 basis points lower than a year ago but clearly markets feel there is a need to re-price,” said Philip McNicholas, Asean FX and rates strategist at Bloomberg Intelligence. “It is also possible this is taken as a sign of desperation to fund by the market.”

The bigger debt sales by Indonesia, seen as a bellwether for risk appetite, suggest that investors are returning to emerging markets as Treasury yields slid in recent weeks. Still, the higher yields demanded suggest that global funds continue to see a risk of higher U.S. yields in the months ahead.

Indonesia’s 10-year yield fell three basis points to 6.57% on Wednesday.

“The incoming bids were healthier than before, but the below-target acceptance reflects misalignment in appropriate yields levels as seen by the government versus current market level,” said Frances Cheung, rates strategist at Oversea-Chinese Banking Corp. in Singapore.

Weekly Flows

There are signs that demand may improve. For one, purchases by overseas investors accounted for 8.4% of total debt sold, up from about 4.3% at the previous offering. The nation’s bonds also saw the first back-to-back weekly inflow since February as Treasury yields declined from their March 30 peak.

Emerging-market bonds are likely to see inflows as investors look for alternatives to U.S. high-yield credit, according to BNP Paribas Asset Management.

Just two weeks ago, Indonesia’s finance ministry said it wasn’t in a rush to meet its debt sale target due to a large cash balance.

Auction Details

The difference between the highest awarded yields and average awarded yields, or tails, have widened across the tenors, suggesting the finance ministry accepted higher borrowing costs.

The table below shows the difference between cut-off yields and average awarded yields in basis points.

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