Global Uncertainty Rises, Government Bond Yields Increase

The yield on Indonesian government bonds has increased in line with rising uncertainty in the global financial market. The ongoing trend of rising interest rates by the Fed, concerns about the impact of the trade war, and crises affecting several emerging market economies have led fund managers to avoid investments in currencies deemed risky, including the Indonesian Rupiah.

Indonesia, as an emerging market economy, has already felt the impact. The Rupiah has depreciated by approximately 8% against the US dollar this year. This weakening of the Rupiah has caused the yield on 10-year government bonds, in both Rupiah and US dollar terms, to rise. Investors are demanding higher yields due to the increased risk of investing in the Rupiah.

The increase in the yield of Indonesian government bonds (SUN) will also increase the government's debt financing burden. Furthermore, the Rupiah's tendency to weaken against the US dollar means the government must incur greater costs to issue new bonds or loans. The yield on 10-year government bonds in Rupiah has increased by 226 basis points this year to 8.52%, while the yield in US dollars has risen by 108 basis points to 4.61%.

(Read Databoks: Inflation Rises, US Treasury Yield Moves Up)