Jakarta, 11 September 2024 – PT Mandiri Sekuritas (Mandiri Sekuritas) is optimistic that investment returns in the Indonesian bond market (INDOGB) for 2024-2025 will be positive at 15%, assuming the 10-year government bond yield will continue to fall to 6% in 2025.
Handy Yunianto, Head of Fixed Income Research at Mandiri Sekuritas, said, "Our optimism stems from three main factors. First, there is a higher likelihood that the Fed will start cutting interest rates in September 2024 which is projected to continue declining into next year. Historically, a decrease in the Fed Fund Rate will be accompanied by a decrease in US Treasury yields and the Dollar Index, which will continue to drive foreign fund flows into the bond market. Second, there is further clarity on the State Budget (APBN) this year and the prospect of fiscal guidance for 2025, where the new government still maintains prudent fiscal policies. Third, as the rupiah strengthens against the USD, the SRBI interest rate also shows a downward trend. With the continued decline in SRBI interest rates, we expect bond demand to increase potentially. Year-to-date, support from onshore investors to the bond market remains strong, especially from retail and non-bank institutions. Foreign fund inflows have also begun to enter the bond market significantly in the last month. However, in terms of the portion of foreign ownership to total outstanding government securities, it is still relatively low."
"In terms of valuation, we estimate that the 10-year government bond yield will potentially fall to the 6.2 percent level or around 6.0-6.4 percent, assuming the Federal Funds Rate (FFR) falls to 4.75%, BI will cut interest rates to 5.75%, the 10-year US Treasury yield is at 3.8%, Indonesia's 5-year Credit Default Swap (CDS) is at 70, and the rupiah will be traded at Rp15,400 against the USD at the end of 2024. A further decline in US Treasury yields also has the potential to strengthen the valuation position of Indonesian bonds," explained Handy.
Amid significant global turmoil in 2024, ranging from increasing geopolitical tensions to constantly high international interest rates, the Indonesian bond market has proven to be resilient. Diversification of investment portfolios becomes very important, and bonds are shown as an attractive instrument because they provide definite and stable coupon cash flows, with competitive yield levels, and guaranteed return of principal investment at maturity.
Some risk notes that may occur in the Indonesian bond market are the postponement of the Fed's interest rate cuts, increased geopolitical tensions, and a significant widening of the budget deficit or above 3% of Gross Domestic Product (GDP).
