Flash Notes:Indonesia Bonds-Where To Next?

Bank Indonesia hiked the Reference Rate by 25bp to 7.75% during the extraordinary meeting on 18th November. This wasin response to the prior day’s adjustment in fuel price subsidy, raising fuel prices by around 30%.

    The IDR bond market reaction this time has been muted compared to June 2013 where the previous fuel subsidy adjustmentwas made. Back in June 2013, IDR bonds repriced aggressively lower and steeper across the curve as prices moved to reflecthigher expected inflation and further monetary response by Bank Indonesia. QE taper tantrum during this same time alsoexacerbated the selloff in IDR bonds.

    Returning to the present, IDR bonds are showing good resilience to the dual policy moves. On the day after the rate hike,bond prices are generally off their opening lows especially in the front end of the curve. Having learnt the lessons of June2013, bond prices this time were less stretched going into the recent round of fuel subsidy change. For example, 2 yearbonds have kept to a 50bp range between 7.60% and 7.10% since March 2014, despite CPI trending lower from 7.75% inMarch to a low of 3.99% in August.

    Looking ahead, we expect to see some consolidation to the globally dominant yield seeking themes.