Indonesian Bonds Trounce India’s, Bringing Yield Parity in View

Indonesia’s bonds have trounced India’s this month and there may be more to come.

Rupiah debt has been the best performer in emerging Asia in November, gaining 6%, while India’s have been outright last, with a gain of just 0.4%. The divergence has driven down the extra yield on Indonesia’s 10-year bonds over India’s to the lowest level in nine months, and brought the prospect of parity into sight.

Global funds have poured into Indonesia’s bonds since the start of October amid an investor friendly end to the U.S. elections, and optimism over progress toward a coronavirus vaccine. They have snapped up a net $1.9 billion of the securities since the end of September, set for the biggest two-month inflow in a year.

The home front is also looking encouraging. The passage through Indonesia’s parliament of a so-calledOmnibus Law last month to cut red tape and simplify bureaucracy is fueling optimism about further measures to encourage job creation and investment. At the same time, the administration and central bank haveeased concern about a possible repetition of this year’s debt-monetization program.

Listen: Bitesize Podcast: Rate-Cut Surprises in Indonesia, Philippines

Inflation is also firmly under control. Consumer prices rose just 1.44% in October from a year earlier, the fifth straight month they have remained below Bank Indonesia’s target of 2% to 4%. Subdued price increases, coupled with the strong rupiah, provided the opportunity for Bank Indonesia tocut interest rates by 25 basis points on Thursday, its first reduction since July.

The situation is far less rosy in India.

The South Asian nation is set to miss its budget deficit projections for the financial year that started in March, with a Bloomberg survey of economists predicting the shortfall will come in at 7.6% of gross domestic product, more than double the government’starget of 3.5%. The deficit has alreadyreached 115% of the full-year estimate in the first six months alone.

Inflation remains the scourge of Indian bond investors. Consumer prices climbed by 7.61% in October from a year earlier, the highest level in six years and the seventh month they have exceeded the upper end of the central bank’s target.

The Reserve Bank of India has been doing what it can to keep yields anchored: intervening in the secondary market through providingwindow guidance and its own version ofOperation Twist — simultaneously buying long-term bonds while selling short-term bills. These have slowed, but not stopped, the steepening of the yield curve.

Indonesia’s 10-year bond yields currently offer a premium of about 26 basis points over India’s, down from more than 200 basis points in May. The many factors outlined above suggest there is every prospect the spread may invert before very much longer.

What to Watch

  • Thailand will release customs trade data Monday with exports forecast to decline for a sixth month
  • Malaysia will publish inflation numbers on Wednesday after the nation has seen seven consecutive months of deflation

Note: Marcus Wong is an EM macro strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice.

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