Indonesia Government Bond 10Y

Foreign funds flowed into Indonesian government bonds in a single day at 656.7 million dollars, the highest since 2019, after the rupiah strengthened and the market expected Bank Indonesia to hold interest rates. Data from Indonesia's Ministry of Finance indicated that foreign investors bought a net 656.7 million dollars last Thursday, marking the highest daily net purchase since July 2019. This brought foreign net purchases in August to 931.74 million dollars, with a trend of receiving capital inflows for a third consecutive month. The increased capital flows reflect recovering investor confidence after Bank Indonesia implemented various measures to attract foreign capital, alongside intervention in the foreign exchange market, which helped support the rupiah's appreciation. Since the beginning of August, the rupiah has strengthened by about 1.8 percent and has become one of the best-performing currencies in Asia. The large foreign capital inflow on Thursday occurred just one day after Bank Indonesia decided to hold its policy rate at its first monetary policy meeting under the leadership of Destry Damayanti, the acting central bank governor, while expanding an incentive program for exchange rate hedging to attract more capital into the country. Wee Khoon Chong, senior Asia-Pacific market strategist at BNY, said the high level of net purchases by foreign investors is a positive result of Bank Indonesia's strategic adjustment, as the market has eased concerns that the central bank would need to raise rates further to curb the rupiah's weakness. Meanwhile, stability in the foreign exchange market has brought investors back into the Indonesian bond market. Another factor supporting Indonesian bonds is President Prabowo Subianto's plan to reduce the government's budget deficit next year, which has eased concerns about the country's fiscal position. Jessica Tasijawa, fixed income analyst at PT Mirae Asset Sekuritas Indonesia, said improved fiscal credibility, a stronger rupiah, and the absence of Bank Indonesia rupiah securities auctions, or SRBI, in the past week were all factors spurring foreign capital inflows into the bond market. Bank Indonesia also announced on Friday that it would reduce the frequency of SRBI auctions from once a week to once every two weeks, after the acting governor signaled reduced reliance on that instrument to attract foreign investors into the rupiah money market. The rupiah has recovered more than 2.7 percent from its record low in early June, supported by Bank Indonesia's rate hikes, easing fiscal concerns, and the weakening of the US dollar. The currency's recovery has coincided with a decline in bond yields, with the 10-year bond yield down 52 basis points from its June peak, while the 5-year yield, which is more sensitive to interest rate trends, has fallen by as much as 69 basis points. Demand for Indonesian bonds was also reflected in last week's government bond auction, where the bid-to-target ratio stood at 2.65 times, the highest since December, while foreign investor orders surged to 17.2 trillion rupiah, or about 972 million dollars, more than double this year's average of 8.3 trillion rupiah, marking the highest foreign investor participation in an auction this year. Handy Yunianto, head of fixed income research at Mandiri Sekuritas, said the currency trend has a greater influence on foreign investors' decisions in the bond market than yield differentials. Therefore, if the rupiah remains stable or continues to strengthen, there is a chance of attracting further foreign capital into Indonesian bonds, even though the yield advantage of Indonesian bonds compared with other markets has narrowed.

Bank Indonesia held its benchmark seven-day reverse repo rate at 5.75% at its regular meeting on the 19th, in line with market expectations and marking a second consecutive hold. The overnight deposit facility rate was also kept at 4.75%, and the overnight lending facility rate at 6.50%. The central bank said the decision was consistent with efforts to strengthen rupiah stability amid global disruptions from escalating Middle East tensions, and to support achieving the inflation target and sustainable economic growth. It also indicated it would continue and expand new monetary measures decided at the previous meeting, including lowering the premium on hedging swap transactions for foreign investors. The meeting was held under Acting Governor Destry Damayanti following the sudden resignation of former Governor Perry Warjiyo.

Bank Indonesia voted to hold its benchmark interest rate at 5.75% at today's meeting, marking a second consecutive hold and matching analyst expectations, after the rupiah strengthened nearly 1% this month, easing pressure for tighter monetary policy. The meeting was the first under acting governor Destry Damayanti, with the board having raised rates by a total of 1% this year to support the rupiah and restore investor confidence. Destry said the rupiah should continue to strengthen, and the central bank is using all monetary tools while expanding incentives to attract foreign capital inflows. It also maintained its economic growth forecast for Indonesia for 2026 at a range of 4.9% to 5.7% and will coordinate closely with the government to support the economy. Investors watched the meeting closely because Destry is the sole nominee put forward by President Prabowo Subianto to become governor of Bank Indonesia, after Perry Warjiyo abruptly resigned in late July, raising concerns about central bank independence.