INDONESIA: J.P. Morgan On Indonesia Fiscal Outlook

RBA-dated OIS pricing is mildly firmer across meetings today. 

• Nevertheless, pricing is 12-24bps softer than pre-RBA (May Meeting) levels.
• A 25bp rate cut in July is given an 82% probability, with a cumulative 73bps of easing priced by year-end.

Figure 1: RBA-Dated OIS – Current Vs. Pre-RBA Level

Source: Bloomberg Finance LP / MNI

• Bond futures are steady in the morning trading session, following the Central Bank's withdrawal of liquidity during the OMO.
• The 10YR future is flat at 108.97 and remains above all major moving averages.  The nearest being the 20-day EMA at 108.82
• The 2YR future is flat at 102.44, sitting just above the 20-day EMA of 102.43
• The CBG 10YR is at 1.69%

Earlier headlines crossed from Japan's FinMin Kato that the country is seeking more JGB holdings by domestic investors. This comes after recent increased scrutiny of Japan's fiscal position, with poor auction results for longer dated securities driving higher back end yields. Speculation is the BOJ may shift its taper plans, while Japan's MOF may change the mix of its bond issuance, i.e. focus more on short dated rather than longer dated issuance. 

• The broader implications of greater domestic participation in JGBs may mean less outbound investment to overseas bonds (and potential equities). This could have implications for offshore debt markets.
• The chart below plots cumulative outbound investment flows into overseas bonds and equities since 2000. Investments into offshore bonds dominates, although outflow trends to both bonds and equities have flatlined in recent years.
• In this sense, Japan has become a less important marginal buyer of overseas bonds/equities in recent years, at least compared to the period prior to 2020. Still, its stock of holdings remains very large.  

 Fig 1: Japan Cumulative Outbound Portfolio Flows (JPY Billions) 

Source: Bloomberg Finance L.P./MNI 

• If we see disinvestment of offshore portfolio holdings, particularly in the bond space, what country's/regions might be impacted? The second chart below looks at cumulative flows back to the start of 2005, with North America very dominate (i.e. the US) in recent years.
• This is followed by the EU, although cumulate inflows peaked back in early 2021. Cumulative flows to Germany have been trending lower over the past decade, and are now comfortably negative. France and Italy have been relatively steady, while France has been losing ground in recent years (but still represents the largest stock. Still, this is still modest compared to the cumulative flows that have been seen to the US.
• There are obviously lots of factors in play in terms local investors asset allocation decisions, but these flows/stocks are worth being mindful of if local investors are called upon to support the home bond market. 

Fig 2: Japan Cumulative Outbound Flows To Long-Term Debt Securities (JPY, Billions)  

Source: Bloomberg Finance L.P./MNI