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ndonesian government bonds are now in the '€œoverbought'€ category as foreign investors racked up the local fixed-income assets, driving the strongest rally in the markets this year buoyed by optimism in the country'€™s reform prospects.

Foreigners have added Rp 10.3 trillion (US$847.8 million) in rupiah bonds to their holdings since President Joko '€œJokowi'€ Widodo officially announced a cut in fuel subsidies last week, according to data from the Finance Ministry'€™s debt management office.

Robust fund inflows had driven up foreign ownership of government bonds to Rp 469 trillion, or 38.4 percent of the total outstanding market '€” the highest level in history '€” as of Friday last week.

'€œThe recent rally was mainly driven by foreign investors who appear to be really excited about the reform prospects, particularly in infrastructure, after the fuel prices hike was implemented,'€ said Adra Wijasena, a fixed-income analyst with Mega Capital Indonesia.

Last week, the transaction volume of bonds in the secondary market averaged around Rp 15 trillion per day, peaking at Rp 18 trillion on Nov. 20, according to data from Mega Capital. That was far above the daily average of around Rp 10 trillion. Strong foreign inflows have pushed down the bonds'€™ yields, with benchmark 10-year bonds trading at 7.76 percent, the lowest level this year, according to the Inter Dealer Market Association, as reported by Bloomberg.

In the bonds market, yields move in the opposite direction of prices, with lower yields indicating more expensive pricing among investors.

'€œThe current price may be too high, with all the benchmark series [of government bonds] appearing to be '€˜overbought'€™ by investors,'€ said Adra. The market may be soon heading to a profit-taking period, he added.

Bank Indonesia (BI), Indonesia'€™s central bank, raised the key reference rate by 25 basis points to 7.75 percent to anchor inflation expectations as well as to safeguard the rupiah and sustain inflows in the bonds market, Deputy Governor Halim Alamsyah said recently.

The tightening move by BI was in stark contrast compared to the policy-easing implemented by its central bank counterparts. Last week, the Chinese central bank cut its deposit rates and its lending rate by 25 basis points and 40 basis points, respectively, hoping to spur its stalling economy.

Trimegah Asset Management fixed-income manager Darma Yudha said that ample global liquidity had lured inflows to Indonesia, as investors searched for a high-yield economy amid the global trend of low yields.

'€œAlso, there have been hints that the S&P [Standard & Poor'€™s] could upgrade Indonesia'€™s credit rating if the government goes ahead in spending more for infrastructure projects,'€ he noted.

International rating agency S&P, which has yet to grant the country'€™s sovereign debt paper with investment-grade status, said last week that the increase in the subsidized fuel prices was a '€œpositive step for the sovereign rating of Indonesia'€.

Another rating agency, Moody'€™s Investors Service, said that the fuel-prices hike was credit positive for the sovereign rating of Indonesia.

Offshore fund managers BNP Paribas and Barclays recently upgraded the outlook for Indonesian bonds to '€œoverweight'€ from '€œneutral'€, citing the positive economic outlook.

BNP Paribas noted that rupiah bonds have had a strong performance among emerging markets, with bond and foreign exchange returns totaling 12 percent year-to-date, second only to the Indian rupee bonds.

'€œWe are constructive on the rupiah bond outlook, given the absence of global inflationary threat and the improving macro backdrop,'€ BNP Paribas analysts Jennifer Kusuma and Mirza Baig wrote in a note to clients.

'€œForeign demand is the wildcard in the demand outlook [for rupiah bonds], but we expect stronger domestic demand, given the backdrop of slowing growth and less dependence on foreign inflows,'€ they noted.