HONG KONG: Strong follow-through demand at Indonesia's dollar bond on Thursday may suggest that appetite for its high-yielding paper remains strong but with yields already near record lows, the headroom for further upside is limited.
In one of the biggest deals in the dollar space from Asia-Pacific, Jakarta's $2.5 billion medium-term note offering this week was nearly 3 times oversubscribed, with half the issue snapped up by US investors.
With rupiah bond yields nearing record lows and the Fed indicating that it was in no hurry to abandon its ultra-easy monetary stance, demand for its second dollar bond offering this year was expected to outstrip an earlier offering in January.
But demand for the paper beat expectations and in secondary market trading, the bond traded up by as much as three quarters of a point in secondary market trading, boosting demand for other assets.
"The bonds are borderline expensive but it's a benchmark and there is a?captive demand for benchmarks from real money managers, so they can issue on their own terms. It's a benchmark, so we are participating," said London-based Agnes Belaisch, head of emerging market strategy fixed-income at Threadneedle, who oversees $2.2 billion in assets.
Strong growth prospects and the fact that Jakarta is a notch away from an investment grade rating, at a time when European countries are suffering downgrades, has only enhanced its appeal.
Scott Bennett, head of Asian Credit at Aberdeen Asset management, who oversees $1.5 billion in Asian credit agrees.
"Investors continue to look favorably on this country and debate over when it will be upgraded to investment grade," he said.
Notwithstanding a small selloff in the opening weeks of 2011, foreigners have again piled into its local currency bonds, buying longer-dated bonds and driving net ownership to a new record of about 32 percent of total debt.
On Thursday, ten year bond yields dipped to 7.81 percent, down by nearly 2 percentage points from January's peaks.
Measuring in dollar-adjusted terms, total returns for Indonesian local bonds is nearly 8 percent so far this year, compared to about 3 percent for the broader JP Morgan GBI-EM Asian index, according to Thomson Reuters data. For the past two years Indonesia local bonds has delivered double digit returns.
But with the front end of the bond yield curve posting a negative yield in inflation-adjusted terms and spreads between ten-year local bonds and comparable US Treasuries hovering near record lows, traders say the scope for capital gains from bond price gains is limited.
"If you add in the currency gains, it still makes sense to buy them, at least from a buy and hold perspective," said the head of interest-rate strategy at a US bank in Singapore.
The Indonesian rupiah has gained about 5 percent so far this year.
Comments
Comments are closed.