Analysts project Indonesia's bond market could stabilize and recover, even as the nation's 10-year bond yield climbed 120 basis points from its January low. This outlook persists despite a market sell-off driven by foreign capital outflows and government fiscal policy concerns. Foreign investors have pulled a net $3.56 billion from local stocks this year, surpassing equity outflows during the 2020 pandemic.
The 10-year bond yield climbed to 7.24 percent on June 8, its highest level in more than a year. This increase included a 36 basis point jump on that single day. The cost of insuring Indonesian sovereign dollar bonds against default also climbed 3 to 4 basis points, reflecting investor apprehension.
The rupiah has depreciated more than eight percent this year, falling from 16,725 per dollar at the start of the year to a low of 18,180 per dollar on June 8. The currency fell 0.9 percent on June 8 alone, mirroring declines in other emerging-market currencies like the ringgit and rupee.
Indonesia's benchmark equity index has dropped 37 percent this year, making it the worst performer among global gauges. An independent analysis indicated a 38 percent drop.
The market sell-off intensified due to investor concern over President Prabowo Subianto’s interventionist economic agenda and the government’s fiscal spending plans. Lawmakers expanded supervision of Bank Indonesia, a corruption probe was launched, and new rules governing commodity exports were unveiled. These actions contributed to investor uncertainty.
Bank Indonesia (BI) and the government have tried to stabilize markets. BI Governor Perry Warjiyo and Finance Minister Purbaya Yudhi Sadewa pledged to maintain market liquidity and boost bond yields to attract inflows. BI had previously raised interest rates by 50 basis points last month to defend the rupiah and has been intervening in markets regularly.
Despite these efforts, the nation's foreign-exchange reserves declined for a fifth consecutive month in May, falling to $144.9 billion. This decline reflects ongoing market interventions and government debt payments, signaling fiscal pressure for authorities.
Khoon Goh, head of Asia research at ANZ Bank, said the increase in Indonesian bond yields indicates foreign outflows. Goh said investors are “demanding higher yields before they are willing to step back in.”
Foreign investors have pulled a net $422 million out of Indonesian bonds this year. This outflow has driven foreign ownership of government bonds to a near 20-year low of 12.6 percent, a drop from nearly 40 percent before the COVID-19 pandemic. This structural shift in ownership reduces a key source of demand.
Adra Wijasena, a fixed income senior analyst at Shinhan Sekuritas in Jakarta, said managing borrowing costs is important. Wijasena said that “if the yields are too high, the government’s interest burden will be heavier at a time when it needs more funding to run various programs.”
Senior Deputy Governor Destry Damayanti said BI will continue to manage the rupiah's movements to prevent excessive fluctuations. Damayanti also said there are no changes to the policy meeting scheduled for June 17-18.
The bond sell-off was worsened by the absence of Bank Indonesia in the market, according to three traders familiar with the central bank's usual transaction patterns. This lack of intervention during key periods allowed yields to climb further, intensifying the market’s negative sentiment.
