Between end-September and end-December, the government bond yield curve in Indonesia shifted downward as yields fell across all tenors. The entire curve shifted further downward between end-December and 15 March. However, yields for the 6- and 9-year maturities rose slightly by 17 basis points (bps) and 12 bps, respectively. Yields at the short-end of the curve fell between 39 bps and 43 bps, while yields from the 15-year maturity through the long-end of the curve fell between 18 bps and 89 bps. The yield spread between the 2- and 10-year maturities narrowed to 86 bps at end-December before widening to 125 bps in mid-March.

The overall bullish trend in Indonesia’s government bond market can be attributed to positive market sentiments from Indonesia regaining its investment grade credit rating from Fitch Ratings (Fitch) in December and Moody’s Investors Service (Moody’s) in January. In addition, easing inflation has led Bank Indonesia (BI) to make further cuts to its benchmark policy rate, bringing it to a new record-low level of 5.75% in February.

Total local currency (LCY) bonds outstanding in Indonesia expanded 3.6% y-o-y in 4Q11 after declining 1.8% in 3Q11. On a quarteron- quarter (q-o-q) basis, bonds outstanding rose 1.2%. In terms of volume, total bonds outstanding reached IDR993.8 trillion (US$110 billion) at end-December. As of end-December, outstanding LCY government bonds had grown a marginal 0.3% y-o-y in 4Q11 to reach IDR846.9 trillion. The growth in LCY government bonds was mainly driven by central government bonds comprising treasury bills and treasury bonds issued by the Ministry of Finance. On the other hand, central bank bills, known as Sertifikat Bank Indonesia (SBI), fell a significant 39.3% y-o-y. Meanwhile, the corporate bond market reported robust growth in 4Q11, expanding 28.0% y-o-y. On a q-o-q basis, growth in corporate bonds was 9.2%. Corporate bonds comprise a small percentage of Indonesia’s LCY bond market, accounting for only 14.8% of total LCY bonds outstanding in Indonesia at end-December.

In January, BI announced plans to purchase long-term government bonds as part of efforts to defend the Indonesian rupiah and stabilize the domestic bond market. Since September 2011, the central bank has been buying short- and medium-term government bonds in the market to support prices. In February, BI announced that it would purchase Islamic government debt to help stabilize the bond market and deepen the shari’a financial market.

In March, the Ministry of Finance submitted its proposed revisions to the 2012 State Budget to the House of Representatives. On 1 April, the Parliament approved the 2012 economic growth assumptions, which include (i) an economic growth target of 6.5%, (ii) an inflation rate target of 6.8%, (iii) an IDR–US$ exchange rate of IDR9,000 per US$1, (iv) a 3-month treasury bill rate of 5%, (v) an Indonesian Crude Price of US$105 per barrel, and (vi) an oil lifting volume of 930,000 barrels per day.