Indonesian 10-year bond yields have.......>

INDONESIA: Indonesian 10-year bond yields have risen a full percentage point in

just one month since we put out a bearish view in "Bank Indonesia Stays Neutral,

But Yields To Rise" (for full story see the Mainwire on April 20, 09:45). Yields

currently sit at 7.6%, having risen from as low as 6.1% in January this year.

- The rise in yields has come despite US yields only rising 10bps over this

period and the Indonesian 10-year CDS rising by 25bps, suggesting that rising

inflation expectations have been the main driver of the yield spike.

- CPI came in at just 3.4% y/y in April and remains close to multi-year lows,

but upside pressure is likely to rise over the medium term. Efforts to boost

loan growth, increased fiscal spending ahead of the 2019 general election, and

the ongoing increase in oil prices all suggest inflation will rise. This in turn

should force BI to undertake further hiking measures in line with its April 17

decision to hike to its 7-day reverse repo to 4.50%, keeping upside pressure on

bond yields.