Indonesian Bonds Get Further Ahead of India Debt With Policy Gap

  • The fortunes of two high-yielding emerging Asian bonds are set to diverge further, with Indonesian notes set to outperform Indian peers driven by central banks’ deviating policies.
  • The spread between 5-year Indonesia and India sovereign bonds is set to widen from 63 basis points, which is already the highest in more than three years.
  • While Indonesia continues to buy bonds with targeted purchases of IDR224tr for 2022, India halted the scheduled bond purchase program in 2021 and has been mopping up excess liquidity.
  • With inflation a threat and the Federal Reserve forecast to raise rates this year, investors are expected to become more selective of their emerging-market exposure. Indonesian debt, a benchmark for risk appetite, also benefits from more benign price pressures, whereas India has seen a surge to a three-decade high.
  • Indonesia government bonds will outperform due to the superior real yield buffer, higher nominal yield cushion against rising core rates and improved external balances, according to Duncan Tan, a Singapore-based strategist at DBS Bank Ltd.
  • Meanwhile, India rates will see increased volatility as the central bank withdraws liquidity and as markets price in the pace of rate hikes, he said.
  • Markets are pricing in three rate hikes in 2022 by the Fed, while analysts surveyed by Bloomberg see the benchmark yield hitting more than 2% by 4Q22. As a result, Indonesia offers the highest real yield in emerging Asia, with the 10-year benchmark offering 3.5% after adjusting for 2022 projected inflation, according to a median of economists surveyed by Bloomberg.
  • This provides some buffer against rising U.S. yields. To be sure, rapid transmission of the omicron variant, which results in more lockdowns, could lead to a more accommodative stance from the Reserve Bank of India. India’s overnight indexed swaps are currently pricing-in around 55 basis points of hikes in the next six months.

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