Market Summary

Yield Movements

Local currency (LCY) government bond yield curve in Indonesia shifted upward between 31 August and 15 October. Yields for all maturities that gained rose an average of 7 basis points (bps), while the 3-year, 4-year, 6-year, and 9-year bonds shed 38 bps, 17 bps, 8 bps, and 6 bps, respectively. Rising yields across the curve largely tracked movements in yields in advanced and regional markets amid rising inflationary concerns and an earlier-than-expected unwinding of asset purchases by the United States (US) Federal Reserve. A shift in monetary stance by the Federal Reserve caused an exodus of funds from the Indonesian government bond market, leading to a continued decline in the foreign holdings share. The increase in yields was also buoyed by a slew of positive developments pointing to a much improved economic outlook after mobility restrictions were eased in September.  

Size and Composition

The size of Indonesia’s LCY bond market reached IDR5,089.5 trillion (USD355.6 billion) at the end of September. Overall growth inched up to 3.6% quarter-on-quarter in the third quarter (Q3) of 2021 from 2.4% quarter-on-quarter in the second quarter. The higher growth was largely driven by government bonds, particularly Treasury bills and bonds, following increased issuance in Q3 2021.  On a year-on-year basis, LCY bond market growth in Indonesia rose 23.9% in Q3 2021, moderating from a 30.6% hike in the preceding quarter. Indonesia remained the fastest-growing LCY bond market in emerging East Asia on a year-on-year basis.

Policy, Institutional, and Regulatory Developments

On 30 August, the Government of Indonesia reduced the tax on interest income on bond investments for domestic investors. The tax rate was lowered to 10% from the previous 15% to align the tax rate with that of foreign investors. (In February, the government reduced the tax on interest income for foreign bond investors from 20% to 10%.) The move is expected to further deepen the LCY bond market, encourage greater participation from domestic investors, and enhance liquidity. The tax cut applies to investments in both government bonds and corporate bonds, including sukuk (Islamic bonds).