Bloomberg News

Indonesia Bonds Withstand Worst Capital Flight: Chart of the Day

October 06, 2011

Oct. 7 (Bloomberg) -- Indonesian bonds, Asia’s best performer in 2011, are withstanding a record sell-off by foreigners as central bank support for the market spurs demand from domestic investors.

The CHART OF THE DAY shows the 10-year sovereign yield has fallen 54 basis points from a three-month high on Sept. 22, even as overseas funds cut holdings by an unprecedented 29 trillion rupiah ($3.2 billion) last month. Local buyers, including Bank Indonesia, bought an estimated 22 trillion rupiah of the notes, according to the finance ministry.

“Even if the crisis in Europe and financial-market conditions worsen, it’s unlikely that selling pressure will overwhelm Indonesia’s bond market,” Jens Lauschke, fixed-income strategist at DBS Group Holdings Ltd., said in an interview in Singapore yesterday. “As domestic entities did not boost positions the past two years, they have substantial capacity to absorb the bonds sold by foreign entities.”

Indonesian bonds have returned 13.2 percent so far this year, the best performance among 10 Asian local-currency debt markets tracked by HSBC Holdings Plc. While international investors accelerated sales last month as Europe’s debt crisis and a U.S. slowdown damped appetite for riskier assets, domestic demand led by the central bank is rising.

Bank Indonesia will continue to purchase government debt to stabilize the rupiah, Hendar, the central bank’s director of monetary policy, said in a mobile-phone text message on Oct. 3. Foreign reserves eased $10 billion last month from a record $124.6 billion in August, the bank reported yesterday.

The previous biggest sell-off of Indonesian bonds, when the global financial crisis prompted foreigners to withdraw 12.7 trillion rupiah in October 2008, boosted the 10-year yield by more than seven percentage points to 21 percent, the highest since at least 2003.

Ten-year yields fell to an all-time low of 6.45 percent on Sept. 9, a day after Bank Indonesia kept its benchmark rate unchanged at 6.75 percent for a seventh month, citing easing inflation.

--Editors: Anil Varma, Reinie Booysen

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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