The rates market is not pricing in monetary easing by BI for the remainder of 2015. Rather, the market would not be surprised if the BI hiked policy rates in response to the Fed's lift-off. With the benchmark 9Y IDR bond (FR70) yield above 8.50%, valuations are attractive. However, the IDR remains vulnerable in an environment of broad US dollar strength, which might affect investors' total returns. The cost of hedging FX risk remains high - 8.20% per annum for a three-month period and 8.70% per annum for a six-month period, notes Standard Chartered.
During the recent sell-off, the central bank supported markets by conducting bond buybacks. Also, according to local media sources, the government is evaluating a slight shift in market borrowing for the remainder of 2015 to foreign currency denominated debt from local currency debt.
"While such signals from policy makers help stabilise market sentiment, a valuation-driven rally is some time away. Overall, in an environment where risk appetite continues to be constrained by macro fundamentals, investors are unlikely to give IDR bonds the benefit of the doubt", says Standard Chartered in report on Thursday.
