Our Investment Team rigorously monitors and researches the Fixed Income market, so you don't have to.

What It Means to Simpan Portfolios

We are positioning our Bond portfolios to maximize returns, while minimizing risk for your. That means capturing a) opportunities in longer-tenor bonds as interest rates come down, and b) mitigate interest rate risk and capture higher yield from shorter-tenor bonds.

As we progress through Q3 2024, Simpan has identified developments in the fixed income market. Below are the key insights you should be aware of:

1. A summary of 2Q24 from a Fixed Income perspective

Increased volatility: The 10-Year Indonesian Government Bond yield experienced significant fluctuations in 2Q 2024, starting at 6.7%, peaking at 7.2%, and ending the quarter around 7.0%. These changes were influenced by easing inflation, a potential pause in US Federal Reserve rate hikes, and a stronger Rupiah.

Bond Duration Position is Critical: 2Q 2024 underscored the importance of precise Bond Duration management in the face of fluctuating yields and volatile exchange rates.

2. Balancing Capital Gains from Longer-Tenor Bonds, whilst capturing Yield for Shorter-Tenor Bonds

Yield Curve Dynamics: The yield spread between 2-year and 10-year Indonesian government bonds is currently much narrower than the long-term average. This narrow spread indicates caution in fully committing to long-duration bonds, though longer-duration bonds still offer potential for capital gains if yields compress further.

Short-Duration Bonds Appeal: There is potential for short-tenor yields to decrease, making short-duration government bonds more attractive. The current spread between 2-year bond yields and 1-month Time Deposit (TD) rates remains too high, implying that there is room for yields to decline, which would enhance the appeal of short-duration bonds.

Supportive Fiscal and Monetary Policies: Indonesia's fiscal and monetary policies, characterized by Bank Indonesia's accommodative stance and the government's prudent fiscal management, support lower yields. This favorable macroeconomic environment, coupled with strong economic fundamentals and political stability, suggests opportunities for strategic positioning in both short and long-duration Indonesian government bonds.

3. Global Rates Pose Challenges to Indonesian Fixed Income

US Treasury vs. Indonesian Govies Spreads Remains Low: The current spread between UST yields and Indonesian government bond yields is 2.87%, requiring Indonesian bonds to offer significantly higher yields to attract foreign inflows.

While foreign investors may find Indonesian yields less attractive compared to UST yields, Rupiah-based investors see higher value.

4. Steepening Yield Curve Presents Opportunities (and Risks)

Mitigate interest rate risk and capitalize on steeping yield curve: We like short-to-mid duration bonds (2- to 5-Year) with yields ranging from 6.6% to 7.1% to balance risk and return, while selectively increasing exposure to 10- to 15-Year bonds.

Fresh opportunities in longer-tenor bonds as interest rates come down: The Indonesian Sovereign Yield Curve shows signs of steepening, with the 2Y and 10Y spread widening from 35 to 55 basis points in 3Q 2024.

We hope these insights are helpful. Read the full Outlook here.

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