Indonesian Bonds Still Offer ‘Attractive’ Return Amid Crowded Long Positioning as Easing Bias Set to Remain, ANZ Says

Press Release
Indonesian debt of short-to-mid term maturity continues to offer an “attractive” risk-adjusted carry and the crowded long positioning in government bonds among foreign investors is a “manageable risk,” according to an Australia and New Zealand Banking Group.

While the country’s central bank has cut interest rates by 75 basis points since June, the five-to10-year yields have eased only by about 40 basis points in the period, Jennifer Kusuma, a senior rates strategist at ANZ Research said Thursday in a research report.

She said foreigners bought 68 trillion rupiahs ($4.85 billion), or 45%, of net supply, in line with historical averages.

A carry trade is a strategy that involves borrowing at a lower interest rate and investing in an asset that provides a higher rate of return.

The benign view on the debt comes a day after Indonesian President Joko Widodo named his cabinet for his second term as the reappointment of former World Bank Managing Director Sri Mulyani as finance minister pointing to policy continuity, Kusuma said.

While acknowledging that Indonesia faces “fiscal constraint ” Kusuma said ANZ Research’s positive disposition on government bonds is predicated on the fact that it expects the central bank to continue supporting the economy with interest rate and liquidity easing.

She also said supply risks “look to have reduced” between now and January after surprise issuance of $1 billion of 30-year US dollar bonds on Oct. 23 to finance the country’s widening fiscal deficit in 2019.

According to ANZ, the bonds continue to offer “attractive risk-adjusted carry” given that the 10-year paper is one of the best local-currency bond performers year-to-date in the region, while the Indonesian rupiah is in the “minority that has strengthened” against the US dollar over that period.

“We are constructive on IDR bonds [Indonesian debt denominated in local currency] in the near term and neutral in the medium term,” Kusuma said. “Our preference is to stay on the front-to-belly part of the curve, up to the 10-year segment.”

That implies a watchful eye on duration, or interest rate risk, even as yields are expected to remain lower in the “near term.”

This post was originally published on Health Opinion

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