While not particularly popular among retail investors, investment in the bond market provides prospects for a safe and steady income, as the government plans to issue more debt papers to fund the nation’s COVID-19 battle, a webinar has concluded.
Handy Yunianto, head of fixed income research at Mandiri Sekuritas, said that low interest rates made it difficult to deliver high rates of return from investing in safer investments, such as time deposits. Meanwhile, the recent volatility in the stock market has stoked fears among individual investors of the prospects of losing their lifetime savings, he added.
“Bonds provide diversification and smooth out the higher volatility connected with equities,” Handy said in his presentation during the webinar “Investing in a high-risk environment: Managing fixed-income funds”, part of The Jakarta Post’s webinar series “Jakpost Up Close”.
Over the past year, Indonesian sovereign bond returns have been higher than the sovereign bonds other emerging markets as well as the Jakarta Composite Index (JCI), the benchmark stock index, according to total return index figures from Bloomberg and Mandiri Sekuritas.
“Foreign investors have enjoyed the bond rally, [but] unfortunately, retail participation is still low,” said Handy, citing data from the Finance Ministry’s debt management office that show a retail investor participation rate of 3 percent in tradable government bonds. Foreign investors account for 38 percent of ownership, followed by non-bank institutions and banks at 22 percent and 21 percent, respectively.
The JCI has dropped 15 percent overall in the past year and nearly 22 percent so far this year. Meanwhile, one-year rupiah deposit rates at local banks stand at around 4 to 5 percent. The government’s last retail bond issuance came with a fixed 6.8 percent coupon rate per year while the benchmark 10-year yield stood at 7.26 percent on Wednesday.
Jason Gozali, the founder of young investors community Investor Muda, stated that “bonds are the most underestimated asset by retail investors”.
“They think the bond market doesn't offer capital gains, that’s wrong because there's the secondary market,” Jason said, arguing that the secondary market provided ample capital gains, especially in long-term benchmark series.
“But nobody talks about this to millennial investors.” Jason also argued that the majority of young investors would be better off investing in bonds than the stock market as the former offered stable returns.
Jason added that a lack of exposure contributed to the low level of participation in government bonds among retail investors, despite his observation that fixed-income funds and money market funds had outperformed equity funds.
The Finance Ministry’s director for government debt securities, Deni Ridwan, acknowledged that the reason many retail investors were reluctant to invest in government bonds was not just because they lacked exposure but also because of infrastructure hurdles.
The Indonesia Stock Exchange (IDX) is currently developing an electronic trading platform that will include government bonds in partnership with global fixed income trading software company AxeTrading Ltd.
“Hopefully, bonds will be traded as easily as trading stocks,” Deni said during the webinar.
The government plans to issue retail government bonds worth Rp 50 trillion to Rp 70 trillion, Finance Minister Sri Mulyani Indrawati’s stated during a April 30 working meeting with House of Representatives Commission XI overseeing financial affairs.
The Indonesian government is mostly financing its Rp 677.1 trillion fight against the COVID-19 outbreak by issuing bonds, with Rp 1.2 quadrillion in debt financing planned for this year, according to the ministry’s data dated June 3. It issued Asia’s first 50-year dollar bond in April and in the second half of the year will offer Indonesia’s first-ever diaspora bonds.
“This is an opportunity to invest and gain profit, but at the same time, also contribute to the fight against COVID-19,” said Deni, emphasizing that investing in government bonds was “investing in a good cause”.
Founder of online financial planner Finansialku Melvin Mumpuni said new investors needed to set out their financial goals and seek advice, prior to choosing an investment instrument.
While bonds can be included in one’s investment portfolio, Melvin explained how assets should be allocated across different investment instrument baskets.
Indonesian government bonds are considered attractive by foreign investors because the country has been able to maintain a low debt to gross domestic product (GDP) ratio of around 30 percent, compared with more than 100 percent in Singapore, Japan and the United States.
Indonesian government bonds in the benchmark 10-year series have also offered a real yield of 5.01 percent, which is higher than other emerging markets such as Thailand (4.05 percent), the Philippines (1.09 percent) and India (0.23 percent), Mandiri Sekuritas data show.