Like a deja vu, as we enter 2022 global bond market became volatile again, marked by an increase in US Treasury yields up to 1.70%. What caused it?
Normalization of economic growth and monetary policies become the main theme of global markets this year. The massive increase in US economic growth in 2021 accompanied by rising inflation prompted the US central bank (The Fed) to make monetary policy adjustments. The direction of the Fed's policy looks increasingly hawkish, accelerating the pace of tapering to USD30 billion per month (USD20 billion US Treasury and USD10 billion Agency Mortgage-Backed Securities) from previously only USD15 billion per month.
In addition, the minutes of The Fed's meeting also indicated expectations of an increase in the benchmark interest rate up to 3 times this year. In fact, this has been anticipated by market participants, as can be seen from the consensus data that estimated that interest rates will increase more than twice this year, even since last November. High base factor has the potential to ease inflationary pressures and cause moderation in the release of economic data in the future, which makes central bank communication crucial, especially in the midst of the dynamics of pandemic and economic normalization. Dovish signals will be considered less sensitive to existing conditions, while signals that are too hawkish can provide negative sentiment for economic recovery and financial markets. Balance is the key.
Reflecting on the turbulence that occurred in 2013, can Indonesian economy today be 'resistant' to the impact of the Fed's normalization?
Like most other countries in Asia, Indonesia is in better state compared to 2013 when The Fed announced their quantitative easing program. Macroeconomic stability indicators such as real interest rates, inflation, current account balance, and foreign exchange reserves showed significant improvements so that this condition could make Indonesia stronger in facing US monetary policy normalization. As long as normalization process is communicated well, is going as planned, and US Treasury yield hike occurs gradually, then Indonesia seems to be ready to face the normalization.
What is the potential of the Indonesia’s rupiah-denominated bond market this year?
In theory it is true that during interest rate hikes cycle periods, bond asset class will face more challenges, in accordance with the principle that interest rates and bond prices are inversely related. However, what needs to be observed is that Indonesia's macroeconomic fundamentals are very good and are better prepared to deal with potential interest rate hikes, supported by several things:
- Reduced targets for Government bond issuance in 2022 to IDR991.3 trillion.
- Economic recovery and government's plan to reduce budget deficit to under 3% in 2023 have the potential to reduce financing pressures and the issuance of SBN in the future. So far, economic recovery had positive impact on state revenues, with tax revenues – for the first time in twelve years – exceeding the State Budget target by 14.9%.
- Low foreign ownership – which has fallen to 19% vs 37% in 2018 in which interest rate hikes also occurred – can reduce the risk of foreign portfolio outflows when global sentiment conditions worsen.
- The continuation of burden sharing scheme between Bank Indonesia and Ministry of Finance can reduce financing pressure in the primary market. Throughout 2021, Bank Indonesia had purchased SBN through burden sharing mechanism of IDR358.3 trillion.
- Utilization of Over Budget Balance (Saldo Anggaran Lebih / SAL) of IDR269.2 trillion – larger than the average SAL in the last 10 years at IDR146.3 trillion – can be used to cover shortfalls in financing in 2022.
We have talked earlier about rupiah currency bonds, what about the opportunity for dollar-denominated bonds?
Historically, although dollar-denominated bonds are influenced more by movements in US Treasury yields, the previously mentioned rupiah bond catalysts also have positive impacts on dollar bonds. The low number of plans to issue dollar bonds, which is only around 11%-14% of the total issuance of SBN, could reduce the amount of supply in the market. In addition, dollar bonds are also supported by the stabilization of the five-year Indonesian credit default swap at <80 basis points, lower than the average in the last 3 months at 81.15 basis points.
Other than the potential catalysts you mentioned, what risks factors do we need to monitor?
The development of COVID-19 new variants and the efficacy of the vaccines, government and central bank’s communications on changes in monetary and fiscal policies – the magnitude and the speed – as well the volatility of US Treasury yields are some of the main risk factors that need to be monitored going forward. The quality of economic data release in the coming months will affect how global monetary policy normalization will be carried out. Especially for domestic market, economic growth acceleration that can impact the rate of credit growth is one of the factors that needs to be observed considering that so far banks have been the majority buyers of SBN.
What portfolio strategy will you apply to face the highly dynamic 2022?
In order to generate alpha on portfolio performance, management will be based on a top-down approach – global and domestic macroeconomic analysis and the strength of bottom-up analysis – for optimal portfolio formation. Our investment strategy will pay attention to several aspects:
In addition, we also continue to monitor liquidity and volatility to ensure that investment management provides optimal returns with controlled risks.
Seeking Seeking α is a monthly communication released by PT Manulife Aset Manajemen Indonesia (MAMI). Presented in the Question and Answer format, Seeking α is aimed at presenting the views of MAMI's forward-looking investment experts, directly before you, MAMI's professional investors.
This month, we feature updated market commentaries from Senior Portfolio Manager, Syuhada Arief.
Senior Portfolio Manager – Fixed Income
Owns Deputy Investment Manager license from Capital Market Supervisory Agency and Financial Institution (Bapepam-LK) according to the decision letter of Chief of Financial Services Authority (OJK) No.KEP18/BL/WMI/201. Before joining PT Manulife Aset Manajemen Indonesia, Arief worked as Senior Fund Manager at CIMB Principal Asset Management. Arief started his career at Asuransi Jiwa Manulife Indonesia and continued on at Avrist Assurance as Fund Manager. Arief acquired the titles of Master of Financial Management and Master of Professional Accounting from Australian National University (ANU) and have acquired the title of Bachelor of Mathematics from Bandung Technology of Science (ITB) and has passed level 1 of CFA.
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