The Indonesian Bond Market Is Projected To Give Results Of Up To 15 Percent In 2024-2025

Bonds (Photo: dock. Antara)

JAKARTA - The return on investment in the Indonesian bond market in 2024-2025 is projected to be positive at 15 percent. As for the 10 year tenor state securities yield (SBN), it will continue to decline to a level of 6 percent by 2025.

Head of Fixed Income Research Mandiri Sekuritas Handy Yunianto explained that this projection is based on three main factors. First, the higher probability that the Fed will start cutting interest rates in September 2024 and is projected to continue to fall until next year.

"Historically, the reduction in Fed Fund Rate (FFR) rates will be accompanied by a decrease in the US Treasury yield and Dollar Index, so that it will continue to encourage the flow of foreign funds to the bond market," Handy said, quoting Antara.

Then second, further clarity on Indonesia's State Budget (APBN) financing this year, and prospects for fiscal guidance in 2025.

"Where the new government still maintains prudent fiscal," said Handy.

Third, he continued, along with the strengthening of the rupiah currency against the United States (US) dollar, the Bank Indonesia Securities (SRBI) interest rate also showed a downward trend.

With the continued decline in SRBI interest rates, he estimates that bond demand will potentially continue to increase, which year-to-date (ytd) support from onshore investors to the bond market remains strong, especially from retail and non-bank institutions.

"The flow of foreign funds has also begun to enter significantly into the bond market in the past month, but in terms of foreign ownership of the total outstanding SBN is still relatively low," said Handy.

In valuation, he estimates that the yield of 10-year SBN tenor bonds will potentially decrease to the level of 6.2 percent or the range at 6.0-6.4 percent, assuming the FFR decreases to the level of 4.75 percent, Bank Indonesia (BI) will cut its benchmark interest rate to 5.75 percent.

"The 10-year yield US Treasury is at 3.8 percent, Indonesia's 5-year Credit Default Swap (CDS) is at 70, and the rupiah will be traded at IDR 15,400 against the US dollar by the end of 2024. Further decline in the US Treasury yield also has the potential to strengthen the valuation position of Indonesian bonds," Handy said.

Handy explained, several risky notes that may occur in the Indonesian bond market, including the delay in cutting the Fed's benchmark interest rate, increasing geopolitical tensions, as well as a significant widening of the budget deficit or above 3 percent of Gross Domestic Product (GDP).