Indian and Indonesia 10-year bond.........>

INDONESIA: Indian and Indonesia 10-year bond yields continue to converge as

Indonesian yields rise much more rapidly than their Indian counterparts. The

spread is currently 27bps with Indian yields currently at 7.31% vs India's 7.58%

and we continue to see the gap closing further.

- While India's higher yields are partly justified by higher rates of inflation,

we see potential for Indonesia's rising default risk to play in increasing role

in driving Indonesian bond underperformance.

- Considering that 10-year CDS spreads are already 87bps higher in Indonesia

(208bps vs India's 121bps), Indonesia's default risk-adjusted 10-year yield is

currently just 5.23% vs 6.37% in India, highlighting the relative attractiveness

of Indian bonds.

- Furthermore, Indonesian default risk looks set to rise further as the

country's higher external debt burden is exposed by tighter U.S. monetary

policy. While Indonesian local bonds face negligible default risk as BI has the

capacity to print local currency, any rise in dollar bond yields will likely

translate into higher yields on local debt.