Macro Strategy

The Vanity of Safe Haven

 

• UST yield has been elevated, well before the Moody’s downgrade, which reflects confluence of 3 structural factors.
• Indonesian assets remain attractive, with INDOGB yields continuing to narrow against UST, while JCI have surged 21% from their recent lows.
• Among the four factors assessed, most support the case for imminent BI rate cut, except for the recent rise in swap rate.

 

The Moody’s Downgrade Impact. We view Moody’s recent downgrade of the US credit rating reinforces the underlying risks that have contributed to elevated US Treasury (UST) yields since April 2025. Further uptick in UST yields approaching 5% is likely to amplify volatility across financial markets. Past S&P and Fitch downgrades weighed on equities, but bond yield movements were less uniform. Moody’s was the last of the three major rating agencies to downgrade, much of the underlying concerns had likely been reflected in market pricing. In our assessment, the sustained elevation in UST yields reflects a confluence of three structural factors, spanning fiscal policy, monetary repricing, and market supply-demand growing imbalance:

 

Fiscal Deficit Risk. Persistent concerns about the US budget outlook remain at the fore as the latest reconciliation bill points to continued high levels of spending and an extension of tax cuts, while cost-cutting initiatives by the Department of Government Efficiency (DOGE) have failed to considerably improve the deficit trajectory. This deteriorating fiscal trajectory was a central rationale behind Moody’s one-notch downgrade and is likely to continue influencing investor sentiment.

Supply-demand growing imbalance. Large and sustained issuance of government debt is testing the market’s capacity to absorb new supply, particularly in the face of declining foreign demand and lower bank participation due to reduced liquidity buffers. The loss of the AAA rating across all three major credit agencies has further eroded the safe-haven appeal of UST, already undermined by persistent policy uncertainty from the US government. Although some institutions may revise investment mandates to accommodate AA-rated securities, the broader shift in risk perception is notable. Foreign participation in US Treasury auctions has trended lower since 2022, leaving domestic investors to absorb an increasing share of new issuance. This pressure is compounded by waning appetite from key holders such as Japanese investors as we noted while Japan’s 52-week rolling total of international long-term debt purchases remains elevated, both 4-week and 12-week rolling flows have begun to lose momentum.

Monetary policy repricing. The short end of the UST curve remains notably elevated, close to 4%, as markets have scaled back expectations for Fed rate cuts. The latest data imply that fewer cuts are now fully priced in, anchoring front-end yields. Given lesser US recession risk from recent tariff developments, the Fed may maintain its wait-and-see stance. Elevated risk premia are also a primary driver of higher long-end UST yields, which we believe will continue in the medium term.

 

What is the impact to Indonesia? Although a narrowing yield differential driven by rising UST yields typically signals potential selling pressure on INDOGBs, recent market behavior has shown a notably different trend. We note 3 points on potential impact following Moody’s UST downgrade:

 

1. Despite elevated UST yield, INDOGB yields have continue to decline with the 10-year benchmark now trading around 6.88%, down from the recent peak of 7.12%, narrowing the spread against UST to 245 bps vs peak 297 bps. This reflects growing investor confidence in domestic macro stability.

 

2. In our view, foreign inflows into SBN were the ultimate gauge, as they have remained consistent in May, reaching IDR73tn MTD, driven partly by expectations of a more stable IDR. Our study with the Granger causality test suggests that shifts in foreign flows have a statistically significant lead-lag relationship with IDR movements, indicating that improved IDR expectations may be a leading driver of continued inflow momentum.

 

3. Following the recent US-China tariff truce, the increased risk on appetite on the riskier asset have also fueled JCI to rebounded sharply, posting a gain of 20.8% since its recent trough in early April. While the rebound appears durable, reflecting both global risk-on sentiment and renewed interest in Indonesian assets, a potential US equity correction following the recent downgrade could trigger some profit-taking bias. As such, we believe additional pro-growth catalysts will be required to sustain further upside. This includes not only a possible BI rate cut, but also fiscal stimulus measures that can accelerate domestic demand recovery and supporting corporate earnings momentum.

 

BI Rate cut outlook, re-iterating our view. We continue to believe that conditions support a more imminent rate cut by Bank Indonesia, rather than a prolonged hold stance. Current conditions closely mirror the 2015–2016 period, marked by weak consumption, manufacturing stagnation, slowing loan growth, and money supply contraction, conditions that previously prompted coordinated fiscal and monetary easing. Manufacturing PMI has dipped below 50, signaling contraction, while non-oil & gas manufacturing growth in 1Q25 hit a three-year low, further justifying preemptive easing to cushion broader economic weakness. Liquidity injections have also picked up, with SRBI maturities outpacing issuance and BI increasing its SBN holdings, pointing to a more accommodative stance. BI’s OMO outstanding level was the lowest since Sep-24. Meanwhile, some exporters expressed tightening USD liquidity, reflected by the rising swap costs. Taken together, these factors strengthen the case for a near-term rate cut.  In our view, while the recent increase in swap costs and limited foreign currency liquidity remain key risks that could constrain BI’s rate policy option, the first three factors support the case for a more imminent rate cut.

 

Foreign inflow patterns indicate growing anticipation of a BI rate cut, which historically intensifies after the cut materializes. We continue to anticipate significant policy responses to counter the ongoing cyclical slowdown, through both fiscal measures (such as stimulus and investment deregulation) and monetary tools (including rate adjustments and liquidity support).

 

Capital Market – Despite rising UST yields, foreign Inflows continues. The UST yields moved higher, with the 10-year rising 6 bps to 4.43% and the 2-year climbing 10 bps to 3.98%. In contrast, Indonesia's 10-year government bond yield edged up modestly by 2 bps to 6.88%. The DXY posted a 0.37% weekly gain, while the IDR appreciated by 0.45% to IDR 16,440 per U.S. Dollar. Supporting sentiment, Indonesia’s 5-year CDS spread narrowed by 7 bps to 83 bps. Equity markets also rallied, with the JCI jumping 4% in the week and breaking above the 7,100 mark.

 

Fixed Income Flow. Foreign investors recorded a net weekly inflow of IDR7.53tn into Government Securities (SBN), lifting total foreign ownership to IDR907tn. On MTD basis, foreign inflows reached IDR7.30tn. Among domestic participants, the banking sector posted a substantial outflow of IDR60.67tn for the week, and IDR55.20tn on MTD basis. Bank Indonesia (excluding repo transactions) acted as a net buyer, with weekly purchases of IDR76.76tn and cumulative monthly inflows at IDR75.78tn. Furthermore, the mutual funds registered a weekly inflow of IDR1.02tn, while insurance and pension funds together added IDR3.36tn in net inflows.

 

SRBI Flow. Total SRBI outstanding further declined by IDR19.24tn over the past week to IDR862tn. Foreign investors booked a net weekly outflow of IDR4.74tn, while on YTD basis, cumulative foreign outflows have reached IDR 20.54tn, bringing total foreign holdings to IDR194tn, or around 23% of total SRBI outstanding.

 

Equity Flow. Foreign investors recorded net inflow of IDR5.3tn during the second week of May (14–16 May), bringing the MTD total to IDR3.8tn, the highest since Sep-24. Despite this short-term improvement, YTD foreign outflows remain elevated at IDR30.9tn. Among individual stocks, consistent foreign inflows were observed in ANTM, BBCA, BRIS, GOTO, and AADI. On the other hand, ASII, PNLF, CUAN, MBMA, and ADRO saw continued foreign outflows.

 

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