Indonesian bonds crush Malaysian peers over budget divergence

SINGAPORE: Indonesian bonds have long been more volatile than their Malaysian counterparts. They suddenly look like the safest option.

10-year ringgit benchmarks underperformed rupee securities, with the additional yield on Indonesian debt falling to 312 basis points, near a three-year low.

Concerns about Malaysia’s budget deficit and the growing vulnerability of ringgit bonds to global fluctuations have been a drag, with weak demand in recent auctions evidence of waning appetite.

Malaysian bonds have suffered a setback as the latest round of stimulus spending to curb infections threatens to worsen the budget deficit and increase the supply of debt.

Rupiah stocks, on the other hand, are reeling from funds as fears about the monetization of Indonesian debt ease and yield-hungry investors return to emerging markets.

“The 10-year Indonesia-Malaysia bond spread is like an approximation of the differential between high yield emerging countries and low yield countries,” said Winson Phoon, head of bond research at Maybank Kim Eng Securities Pte in Singapore.

“It tends to widen during emerging market risk when the low-yielding country shows better resilience, and vice versa.”

The spread could narrow further, given the divergent outlook for the two markets.

Malaysia is reviewing its budget deficit and economic growth targets after authorities unveiled a $ 9.7 billion stimulus package to ease the fallout from a two-week lockdown.

It comes after the government widened its 2021 deficit target to 6% of gross domestic product from an earlier projection of 5.4%.

On the other hand, Indonesia sticks to its budget deficit estimate of 5.7% of GDP announced last December. The plan is for the shortfall to fall below its pre-Covid 3% cap by 2023.

The latest auction results are revealing. A sell off of benchmark 10-year ringgit bonds on Tuesday recorded an offer-to-cover ratio of 1.97 times, lower than the 2.02 times average seen for non-Islamic offers this year.

On the same day, inbound bids at an Indonesian sale increased, with global funds providing 19% of the total, the highest level of foreign demand this year.

Foreign ownership

Finally, Indonesian bonds also have this in their favor: rates should remain well anchored. As investors re-prepare for the securities, foreign ownership has fallen to 23% of total stock, from 39% at the start of last year.

The level fell as the Bank of Indonesia increased its holdings to 23.2% as part of its debt purchase program.

By comparison, Malaysian bonds may have become more sensitive to fluctuations in global markets after foreign investors increased their stake to 26% from 21% a year ago.

Bank Negara Malaysia only holds 1.3% of outstanding government securities, according to central bank data. -Bloomberg

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