High-yield contest in new phase as Indonesia-India spread jumps

Indonesia's 10-year bond yield climbed three basis points on Wednesday to 6.89%, after India's slid 18 basis points the previous day to 5.94%

The contest between emerging Asia’s two high-yield sovereigns appears to be entering a new phase as the extra yield on Indonesia’s 10-year bonds over India’s jumped by the most since May.

The premium on Indonesia’s benchmark bonds over their South Asian peers climbed from near the lowest in five months on Tuesday as India’s yields tumbled after the central bank announced measures to boost demand for the nation’s debt. At the same time, Indonesia’s yields have been creeping higher amid news that parliament is seeking law changes that might risk the central bank’s independence.

Indonesia’s 10-year bond yield climbed three basis points  on Wednesday to 6.89 per cent, after India’s slid 18 basis points the previous day to 5.94 per cent. The current spread of 97 basis points is up from as low as 54 basis points on August 24. Indonesian bonds had outperformed Indian ones over the past five months as inflation in the archipelago has slowed, with the consumer price index falling to a record 1.32 per cent in August. That gives Bank Indonesia room to keep cutting interest rates after lowering its benchmark by a total of 100 basis points this year.

 

 

In comparison, Indian inflation accelerated to 6.93 per cent in July, above the central bank’s target range of 2 per cent to 6 per cent.

“All factors considered, I am in the camp that thinks that 10-year Indonesia-India bond yield spread will re-tighten,” said Duncan Tan, a strategist at DBS Group Holdings in Singapore. 

“There needs to be the consideration of inflation outlooks in both countries. In Indonesia, inflation continues to decline below BI target range. In India, the persistence of above-target inflation is limiting RBI’s appetite for more rate cuts.”