Indonesia’s government bonds fell, driving the 10-year yield to a seven-month high, after the central bank signaled the next move in interest rates is likely to be an increase. The rupiah fell for a fourth day.
“We already changed to neutral since February last year and now we’re even moving toward a tightening bias,” Deputy Governor Perry Warjiyo said in an interview yesterday in Jakarta. A planned fuel price increase threatens to boost inflation to as much as 7.7 percent this year, compared with a 5.5 percent pace should fuel rates remain unchanged, reducing the central bank’s scope to contain borrowing costs and support economic growth, he said. Bank Indonesia kept its benchmark interest rate unchanged since February last year.
“We are expecting Bank Indonesia to raise its reference rate after the fuel price hike, which will see a further correction in bonds,” said Dini Anggraeni, a Jakarta-based fixed-income analyst at PT Mandiri Sekuritas, a unit of the nation’s largest lender by assets. She predicts the benchmark interest rate will be raised by as much as 50 basis points to 6.25 percent by year-end and the 10-year bond yield will climb to 6.1 percent.
The yield on the May 2023 notes rose three basis points, or 0.03 percentage point, to 5.73 percent as of 10:34 a.m. in Jakarta, the highest level since October, prices from the Inter Dealer Market Association show.
The rupiah fell 0.1 percent to 9,780 per dollar, according to prices from local banks compiled by Bloomberg. The decline compared with slides of 0.5 percent or more for currencies in Malaysia, Thailand and the Philippines, which dropped after Federal Reserve Chairman Ben S. Bernanke signaled a possible tapering of monthly bond purchases that boost the supply of dollars.
Bank Indonesia’s readiness to raise interest rates “will help support the rupiah,” Anggraeni said. One-month non-deliverable forwards on the rupiah declined 0.7 percent to 9,882 per dollar, the biggest drop since January, data compiled by Bloomberg show. That is 1 percent weaker than the spot rate.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell six basis points, or 0.06 percentage point, to 6.74 percent.
“The rupiah is relatively stable compared with other Asian currencies,” said Mika Martumpal, a currency analyst at PT Bank CIMB Niaga in Jakarta. ”Bank Indonesia is always present in the market to smooth out volatility.”
Indonesia’s bonds fell yesterday, pushing the 10-year yield up six basis points, as the government announced plans to boost debt sales to fund a widening budget deficit.
Net issuance would rise to 241.3 trillion rupiah ($24.7 billion) under new 2013 budget proposals, up from a previous target of 180.4 trillion rupiah, Finance Minister Chatib Basri said yesterday. The government seeks to revise its fiscal deficit plan to 2.48 percent of gross domestic product, from 1.6 percent, Vice Finance Minister Anny Ratnawati said on May 20.
“The higher debt burden will make Indonesian bonds less attractive,” said I Made Adi Saputra, a fixed-income analyst at PT Nusantara Capital Securities in Jakarta. “The government will have less clout to demand lower yields at auctions.”
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