Neutral outlook on IDR bonds

Analysts have a Neutral outlook on IDR bonds. With the benchmark 9Y IDR bond yield trading c.8.65%, valuations are attractive. However, the Indonesian rupiah (IDR) remains vulnerable in an environment of broad USD 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 Societe Generale. 

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, analysts think, 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 Societe Generale.