Indonesia Embraces Higher Borrowing Costs to Sell More Bonds

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Indonesia Embraces Higher Borrowing Costs to Sell More Bonds

Chester Yung and Masaki Kondo
·2 min read

(Bloomberg) -- Indonesia offered higher yields to sell the most bonds in two months as the government continues to raise funds for stimulus to counter the impact of the pandemic.

The finance ministry on Tuesday sold 21.68 trillion rupiah ($1.48 billion) of non-Islamic debt, excluding T-bills, up from just 3.75 trillion rupiah at the last conventional bond sales two weeks ago. The larger amount sold saw the bid-to-cover ratio plunge to 1.86, the lowest in a year.

“Domestic yields are still more than 100 basis points lower than a year ago but clearly markets feel there is a need to re-price,” said Philip McNicholas, Asean FX and rates strategist at Bloomberg Intelligence. “It is also possible this is taken as a sign of desperation to fund by the market.”

Weakness in the Indonesian currency is also making the debt sales harder going for the government, with the rupiah dropping about 3.8% this year. However, a recent slide in Treasury yields -- which had soared by more than 80 basis points in the first quarter -- may be emboldening emerging-markets to test investor appetite.

Just two weeks ago, the finance ministry said it wasn’t in a rush to meet its debt sale target due to a large cash balance. In recent weeks, Russia had canceled an auction, while South Africa saw lower demand than usual.

The rupiah is the second-worst performing currency in emerging Asia after surging U.S. yields led to an outflow of funds from emerging-market assets. The currency slipped to 14,635 per dollar on Tuesday, the weakest level since November.

Indonesia’s bonds dropped after bidding closed at 11am local time, with the benchmark 10-year yield up six basis points at 6.60% on Tuesday. The ministry plans to raise as much as 5.77 trillion rupiah in a greenshoe option on Wednesday.

Auction Details

The difference between the highest awarded yields and average awarded yields, or tails, have widened across the tenors, suggesting the finance ministry accepted higher borrowing costs.

The table below shows the difference between cut-off yields and average awarded yields in basis points.

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