Market Summary

Yield Movements

Local currency government bond yields in Indonesia climbed across all tenors, leading the yield curve to shift upward between 28 February and 15 May. The overall rise in yields was largely driven by a market sell-off as investor sentiments soured amid heightened global market uncertainty. As the coronavirus disease (COVID-19) pandemic spread globally, rising risk aversion led investors to shift toward safe-haven assets. Further contributing to the risk-off sentiment was S&P Global's downward revision of the sovereign rating outlook of Indonesia from stable to negative in April. The rise in yields was also reflective of the government's need for a wider budget deficit to fund COVID-19-related stimulus measures and recovery efforts, as well as of Bank Indonesia's less aggressive monetary policy stance compared with regional peers.

Size and Composition

The local currency bond market in Indonesia reached a size of IDR3,324.7 trillion (USD203.8 billion) at the end of March on growth of 0.4% quarter-on-quarter (q-o-q) and 7.8% year-on-year (y-o-y) in the first quarter of 2020. The outstanding size of government bonds reached IDR2,881.8 trillion at the end of March, up 0.6% q-o-q and 8.4% y-o-y. Growth was solely contributed by central government bonds, comprising of Treasury bills and Treasury bonds. Total corporate bonds outstanding stood at IDR442.9 trillion at the end of March, down 0.5% q-o-q but up 4.4% y-o-y. The LCY bond market in Indonesia largely comprises government bonds, with a share of 86.7% of the aggregate bond total at the end of March. The remaining 13.3% share was accounted for by corporate bonds.

Policy, Institutional and Regulatory Developments

In April, Bank Indonesia commenced its participation in the weekly auctions of the government to purchase Treasury instruments. Previously, Bank Indonesia was only allowed to purchase bonds from the secondary market. The regulation in lieu of Law 1/2020, which was passed in March, allows the central bank to participate in the weekly auctions as a noncompetitive bidder. Bank Indonesia and the Ministry of Finance set a limit on the central bank's bond purchases at 30% for Shari'ah Treasury auctions and 25% for conventional Treasury auctions. Bank Indonesia's purchase of government bonds in the primary market is only allowed when the market is unable to absorb the offers.