The domestic bond market is particularly a concern as investors will remain jittery over how the global economy will develop given the lack of clarity in the policies of US president-elect Donald Trump.

JPMorgan Securities Indonesia managing director and head of investment banking David Dharma Thomas said global investors were currently waiting for policy direction from Trump, who promised an expansive fiscal policy through infrastructure spending next year to propel growth.

With expected higher economic growth in the US, he said inflation was predicted to surge, and thus encourage the US Federal Reserve to raise its fund rate.

“The market has already priced in the potential higher rates in the US. With the new president-elect, I think it’s very likely for the Fed to basically increase the rate sooner rather than later,” he said.

Such a situation would put pressure on Indonesia’s US dollar bond market, David said, as most of the debt papers’ pricing was based on US Treasury bills with 10- to 30-year tenors.

Yields for 10- and 30-year Treasury bills stood at 2.12 percent and 2.93 percent, respectively, at close of trading on Nov. 10, according to Indonesia Bond Pricing Agency (IBPA) data.

David said most of the holders of Indonesia’s US dollar bonds were foreign investors through global fund managers. This will encourage them to benchmark the local yields versus the higher-yielding assets offered in more mature markets, specifically those in the US.

“When rates in the US are going up, obviously people will demand better yields from emerging market papers including from Indonesia,” he said, adding that there would always be risks of capital reversals during volatile times.

However, David believed the government and Bank Indonesia (BI) had done well enough to cushion the impact of the volatility, such as through the tax amnesty program that was received positively by investors as a means of improving state revenue and foreign fund inflows through repatriation.

He said the government’s plan to issue bonds for the 2017 allocation early, at the end of this year, would also help the government anticipate the risks that may unfold next year.

Mega Capital Indonesia fixed income analyst Adra Wijasena said a Financial Services Authority (OJK) regulation issued earlier this year requiring insurance firms and pension funds to invest a minimum 20 percent of their funds in government bonds (SBN) had also helped ease the risks of fund outflows.

“The policy has lowered the volatility risk and reduced foreign domination,” he said, adding that 38 percent of Indonesia’s government bonds were still held by foreign investors.

Adra acknowledged global volatility had cut investors’ appetites for sovereign bond (SUN) auctions planned before year-end.

If the incoming bids turned out to be below expectations, he said, the government would have to pay higher yields, which would then lead to higher costs of funds.

“If the auction is not successful enough, the government can offer the debt through a private placement scheme,” he said, pointing to a scheme in which the government directly sold its debt papers to certain state institutions, such as BI, the OJK, regional administrations and major dealers.

Edward Lee, the head of Southeast Asia equity capital markets with Deutsche Bank believed the financial market remained attractive despite the global turmoil as could be seen by Indonesia’s stock index outperforming its peers this year as a result of substantial fund inflows.

The inflows amounted to between US$2.6 billion and $2.7 billion yearto-date, higher than the $1.7 billion in the same period last year.

“There are clearly external factors beyond the control of the government, but I think with respect to the measures [the government] took on the macroeconomy, we feel that backdrop will be supportive of a continued improvement of the [stock] index and the whole environment of corporate earnings,” he said.

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