Bloomberg News

Indonesian Bonds Extend Gains on Surprise Central Bank Rate Cut

October 11, 2011

Oct. 11 (Bloomberg) -- Indonesia’s benchmark 10-year bonds extended gains, pushing yields to the lowest level in a month, after the central bank unexpectedly cut borrowing costs. The rupiah maintained its decline after the decision.

The notes advanced for a fourth day on speculation the central bank is buying the debt as foreigners trim their holdings. Bank Indonesia lowered its reference rate by 25 basis points to 6.5 percent after holding it steady for seven months, citing easing inflation. All 15 analysts in a Bloomberg survey predicted the rate would stay at 6.75 percent.

The yield on the 10-year bond fell seven basis points, or 0.07 percentage point, to 6.57 percent as of 3:29 p.m. in Jakarta, prices compiled by Bloomberg showed. The rate was down five basis points before policy makers announced their decision.

“The central bank is worried about slowing growth in the global economy,” said Juniman, chief economist at PT Bank Internasional Indonesia in Jakarta who goes by only one name. “The rupiah will depreciate in the short term because yields are going down. Investors expected the rate to be flat.”

The rupiah was 0.4 percent weaker at 8,941 per dollar, according to prices from local banks compiled by Bloomberg. It traded at 8,938 in the run-up to the announcement.

The currency fell 4 percent in the past month and reached 9,115 on Sept. 26, the lowest level since June 2010, as a faltering U.S. economy and Europe’s debt crisis curbed investor appetite for emerging-market assets, including Indonesia.

Bond Holdings

The central bank said today inflation this year may be lower than 5 percent. Consumer prices rose 4.61 percent in September from a year earlier after having climbed 4.79 percent the prior month, official data showed on Oct. 3.

The 10-year yield, which reached a record low of 6.45 percent on Sept. 9, dropped 57 basis points in the last three days. The central bank will purchase government bonds and remain in the currency market to stabilize the rupiah, Hendar, director of monetary policy who uses only one name, said on Oct. 3.

Foreign ownership of the nation’s debt declined 4 trillion rupiah ($447 million) this month through Oct. 5 to 214.1 trillion rupiah, after record withdrawals of 29.3 trillion rupiah in September, according to data from the finance ministry’s website.

“BI is trying to make yields go down,” said Handy Yunianto, a fixed-income analyst at Mandiri Sekuritas in Jakarta. “Foreigners are still cutting their holdings of government bonds. They are trying to take profits and wait for better entry levels to come in.”

The government will aim to sell today 500 billion rupiah of Islamic bonds maturing in six months to 25 years, Yunianto said.

Indonesian bonds have returned 16 percent so far this year, the best performance among 10 Asian local-currency debt markets tracked by HSBC Holdings Plc. Debt in the Philippines and Singapore delivered the second-biggest gains, rising 6.8 percent.

--Editors: James Regan, Anil Varma

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

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


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