(March 4): Global fund managers are betting on Indonesian bonds as they see them as a key beneficiary of the expected Federal Reserve (Fed) easing cycle.

Ashmore Group plc says Indonesia’s relatively high inflation-adjusted policy rate provides plenty of room for interest-rate cuts when the Fed starts easing. Fidelity International sees potential for carry in Indonesia’s flat yield curve. abrdn plc cites healthy government finances as the reason to buy rupiah debt.

“It’s pretty hard to ignore a market like” Indonesian bonds, said Jerome Tay, an investment manager at abrdn in Singapore. They are likely to outperform their regional peers this year, he said.

Indonesia’s inflation-adjusted interest rate is currently at 3.25%, the highest in Asia after the Philippines and Thailand, giving the central bank ample scope to cut borrowing costs to boost the economy. Moreover, the budget deficit at a 12-year low is also raising the appeal of the nation’s bonds.

A delay in Fed rate cuts this year and concern that programs such as the free-lunch plan advocated by Indonesia’s new President Prabowo Subianto have eaten into rupiah bond gains. Still their 1% decline year is the smallest loss in emerging Asia, according to data compiled by Bloomberg.

“Indonesia starts with such a strong fiscal position that there is probably room to loosen up somewhat on the fiscal side without spooking markets or leading to any significant negative outcome,” said Ian Samson, a portfolio manager at Fidelity in Singapore. “Indonesian government bonds are one of, if not our top pick within the Asian duration space, particularly at that five-year part of the curve that will benefit more from nearer term easing expectations.”

Gustavo Medeiros, head of global macro research at Ashmore is maintaining his overweight position in Indonesian bonds, while favouring the long end of the curve on expectations the market would be less volatile than its peers.

Latam alternative

The premium offered by Indonesian 10-year bonds over similar-maturity Treasuries has shrunk to near the narrowest this year, which may curb some of the overseas demand for rupiah debt. Funds may instead opt for bonds in Latin America, where central banks have already started easing.

“Foreigner interest is muted because there are better yields on offer in Brazil, Mexico and Eastern Europe, as well as prospects for policy moves,” said Philip McNicholas, an Asia sovereign strategist at Robeco Group in Singapore. “Bank Indonesia has made it clear that they won’t move until the Fed does, so investors can afford to run the position at or slightly under benchmark weighting for the time being.”

Global funds net purchased US$106.1 million (RM501.69 million) of Indonesian bonds on Feb 29, the most in six weeks, according to finance ministry data. Still foreigners only held about 14% of Indonesia’s total outstanding debt compared with almost 40% at the start of 2020.

Rupiah stability

Indonesia’s central bank has so far refrained from cutting rates as it focuses on keeping the rupiah stable, with the dollar strengthening due to rapid paring of Fed rate-cut bets.

“We are aware that the domestic economy needs a boost from policy rates but we can’t adjust rates yet under current global uncertainty,” Bank Indonesia deputy governor Juda Agung said in a forum on Thursday.

Still, some funds are taking steps now to prepare for when those rate cuts begin.

“We see Indonesian bonds as a good way to play the global easing cycle that’s coming up partly because Indonesia is likely to follow the Fed rather closely,” Fidelity’s Samson said. Developed-market yield curves are deeply inverted, whereas the rupiah bond curve is quite flat, “which means it’s a better carry way to play for the easing cycle”, he said.