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Indonesian Bonds Eye US CPI for Rally Boost, Yield Spread 250bps

Indonesian Bond Rally Hinges on US CPI Outcome, Amid Global Market Anticipation and Domestic Economic Challenges

By Athena Xu

5/14, 23:41 EDT

Key Takeaway

  • Indonesian bonds rally in anticipation of softer US CPI data, with foreign inflows increasing and a yield spread over US Treasuries at 250bps.
  • Market sentiment influenced by both domestic challenges and global factors, including US Federal Reserve's rate policies.
  • Global markets await US CPI report with high risk premium in S&P 500 options; mixed reactions observed across stocks and bonds.

Indonesian Bond Rally Awaits US CPI Data

Indonesian bonds have seen a recent rally, buoyed by the anticipation of softer US Consumer Price Index (CPI) numbers. This optimism is reflected in the increased foreign inflows into the Indonesian bond market observed this month. The yield spread of Indonesian 5-year bonds over US Treasuries currently stands at approximately 250 basis points (bps), which is about 35bps higher than the average over the past year. The Bank Indonesia's (BI) recent rate hike has enhanced the attractiveness of these yields from a carry perspective, despite the looming risk of further hikes if the Indonesian rupiah depreciates. The real rate in Indonesia, defined as headline inflation versus the central bank rate, is notably attractive at 3.25%, in stark contrast to India's 1.7%. Although the volatility of the Indonesian rupiah has decreased since mid-April, it remains a concern as it is nearly double that of India's volatility.

Domestic and External Factors Influence Market Sentiment

The Indonesian bond market's future trajectory is influenced by both domestic and external factors. Internationally, the market is closely watching the US Federal Reserve's actions, especially regarding interest rate policies. Domestically, Indonesia faces its own set of challenges, including the transition of presidential leadership and a slowdown in exports, which could impact the current account negatively. These factors, combined with Indonesia's reliance on foreign capital, suggest that the Bank Indonesia might adopt a cautious stance until the Federal Reserve begins an easing cycle. Any signs indicating the commencement of such a cycle could potentially invigorate bond investors.

Global Markets on Edge Ahead of CPI Announcement

Globally, markets are bracing for the upcoming US CPI report, with S&P 500 options indicating a significant risk premium. Federal Reserve Chair Jerome Powell has reiterated the central bank's intention to maintain its current rate, adding to the market's anticipation. This cautious approach by the Fed has led to a mixed reaction in the markets, with stocks and bonds experiencing gains. The market sentiment is further influenced by the resurgence of meme stocks, such as GameStop, and a potential short squeeze in the copper market. Analyst Simon White expresses skepticism towards the prevailing 'bad news is good news' regime, highlighting the complex dynamics at play in the global financial markets.