(Bloomberg) — A three-year rally in Indonesian sovereign bonds is heading for a crash that could make them Southeast Asia’s worst performer.
Bonds are the most vulnerable in the region to any rate hike, according to a Bloomberg analysis of data dating back to 2005. They tend to fare worse in the three months before and after the start of a rate hike cycle. compared to their peers, as Bank Indonesia generally raises rates faster than other central banks.
Policymakers prepared the market for an exit from pandemic-era support by siphoning cash, while stressing the need to respond to the Federal Reserve’s intention to rise from March. BI recently acted boldly to stave off capital outflows, raising rates by 175 basis points in 2018 during the latest round of global tightening.
“Bank Indonesia may well end up rising at the March meeting due to the potential for the Fed to spook global markets at the FOMC meeting just before that,” said Wellian Wiranto, economist at Overseas- Chinese Banking Corp. in Singapore. There is room for three key rate hikes this year, with a risk for more if inflation heats up, the economist said.
Since 2008, the Indonesian central bank has followed up with an increase of at least 75 basis points in the three months following its first hike. The exception was in 2011, when it cut its rates within the year.
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Some investors have already become cautious about new debt issuance by Indonesia. On Tuesday, a bond sale drew a bid-to-cover of 1.78x, the lowest since April 2020.
In 2018, rupee bonds ended the year with annual losses of 8% as BI rose over a seven-month period from May. Yields on the benchmark bond then jumped 170 basis points to 8.03%. They are now trading at 6.51%.
Yields on shorter Indonesian debt have yet to jump as BI’s warning of impending hikes in line with higher global rates is set against subdued domestic inflationary pressures. 2-year bonds still offer an 80 basis point premium over the policy rate, compared to an average of 160 basis points in the three months before the rate hike in May 2018.
For those seeking refuge in the region, Thai bonds appear to be the least vulnerable to domestic central bank tightening. Historically, national debt offered yields of between 2.8% and 5.8% in the three months before and after a benchmark rate hike by the Bank of Thailand. One of the reasons could be the less pronounced rise of only 25 basis points on average after the initial increase of a quarter point, accompanied by a 2.5% appreciation of the baht, thanks to better growth expectations. .
Note: Refers to bond yields and total returns before and after the start of a new rate hike cycle, looking at cycles dating back to 2005
(Adds Indonesian bond auction results to paragraph six)
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