Asia Rates: IndoGBs in a sweet spot

Many factors favor IndoGBs
Duncan Tan21 Oct 2021
    Photo credit: Unsplash Photo

    This week, besides standing pat on the policy rate, BI signalled that IDR liquidity will be kept flushed and rate hikes are not likely until 4Q of 2022. From a fixed income perspective, IndoGBs are in a sweet spot. With a strong IDR (supported by rising prices of key commodity exports) and low inflation, BI has more flexibility, compared to many regional and EM peers, to hold off on policy normalisation or even tilting to a less dovish stance. In terms of rates implications, there would be comparatively less upward pressures on the belly of IndoGB curve (around 5Y) because BI's rate hike cycle is still some way out. The longer tenors (10Y, 20Y) would also be better-anchored as there are little risks of BI being perceived as behind the curve on inflation.

    There have been some market concerns lately around the trend of IndoGB outflows from offshore investors since early September. We are not entirely surprised - Foreign outflows from IndoGBs are quite typical during periods of rising US rates, especially if the global growth outlook is not particularly strong. That said, in the current context, we think that the lack of inflows (or outflows as long as they are gradual) would be manageable. From a fiscal financing standpoint, 4Q IndoGB issuance target is very small, and thus will be easily absorbed by locals. From an external funding standpoint, barring a pullback in prices of key commodity exports, Indonesia's current account surplus could extend into 4Q (BI expects a surplus for 3Q).

    In recent weeks, higher US rates have been the primary driver of higher Asia rates. But when we compare relative moves, we see clear differentiation on the basis of respective countries' exposures to oil/energy prices. Countries with larger oil/energy trade deficits (imply larger impact on terms-of-trade and current accounts) and bigger passthrough risks to domestic inflation (fuel prices are marked to market rather than subsidised/capped) are seeing their interest rates rise more. Within the Asia rates space, we would underweight India/Thailand/Korea/Philippines rates (negative exposures) vs overweight Indonesia/Malaysia rates (positive exposures), as a play on rising oil/energy prices.

    Duncan Tan

    Rates Strategist - Asia
    [email protected]

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