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RI bonds drop as deficit raises concern
The bonds market extended correction on Wednesday, contrary to the substantial gains in the stock markets, raising concern that the governmentâs fixed income assets could be the most vulnerable to economic fundamental deterioration
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The bonds market extended correction on Wednesday, contrary to the substantial gains in the stock markets, raising concern that the government's fixed income assets could be the most vulnerable to economic fundamental deterioration.
The yield for the government's five-year bonds climbed one basis point to touch its highest level in five months of 7.86 percent as of 9:52 a.m. in Jakarta on Wednesday, prices from the Inter Dealer Market Association show, as quoted by Bloomberg.
Bond yields move opposite to prices, with higher yields meaning cheaper prices for investors and more expensive borrowing costs for the government.
Prior to Wednesday's trading, the price of government rupiah bonds had already fallen for three consecutive days, -0.1 percent on Tuesday or by an accumulative -0.3 percent, according to data compiled by Maybank Kim Eng Securities.
'Investors opted to reduce their positions because improvements in our economic fundamentals are likely to remain volatile, especially on expectations that the trade balance is likely to swing into deficit again in June,' said Ezra Nazula, a fixed-income analyst with Manulife Asset Management Indonesia, the country's second-largest fund manager.
'Developments on the macroeconomic side are overshadowing the positive sentiments from our
peaceful presidential elections,' he added.
The recent correction in the government bonds market ran in contrast to the strong rally in the equity market. The Jakarta Composite Index (JCI) rose 0.85 percent to close at 5,113 on Wednesday, with the benchmark indices rallying 1.8 percent in the past two days.
Analysts have warned that the local bonds market might be more susceptible to capital outflows if there is any significant deterioration in domestic economic fundamentals.
Bank Indonesia (BI) estimated that the current-account deficit, the major worry among investors, might swell to 4 percent of gross domestic product (GDP) in the second quarter, twice higher than the first quarter.
'The current-account deficit spooks investors because it could weaken the rupiah, the currency's weakness in turn will have a contagious effects,' explained Adra Wijasena, a fixed-income analyst with Mega Capital Indonesia
The weaker rupiah could also trigger outflows at it could erode the returns of investment in local currency bonds, he added.
The rupiah weakened 96 basis points to trade at 11,805 per dollar on Wednesday, according to the Jakarta Interbank Spot Dollar Rate (JISDOR). The currency has weakened 1.5 percent in two days on widening current-account deficit expectations.
Adra also underscored the susceptibility of Indonesia's bond markets to foreign fund outflows, given the high foreign ownership. Of all the tradable rupiah bonds in the secondary market, foreigners now own 36 percent, or Rp 403.5 trillion (US$34.5 billion), the highest overseas holdings in history, according to data from the Finance Ministry's debt management office
'Foreign investors pay more attention to domestic factors, such as the current-account deficit, compared to external factors, such as the developments in interest rates in the US,' he warned.
Commenting on the issue, Deputy Finance Minister Bambang Brodjonegoro said that the government would make its best efforts to rein in imports and narrow the current-account deficit, emphasizing the fact that Indonesian policy makers were now still in a 'stabilization mood'.
'During the road show for our eurobonds, I noticed that many foreign investors were happy with our strategy of prioritizing stability over growth. This is because they wish to see stability in our economy so that the value of their assets won't depreciate,' he said late Wednesday.
