January 15, 2013 / 10:42 AM / 5 years ago

UPDATE 1-Indonesia sees strong debt auction demand, yields rise

(Updates with yields, analyst comments)

By Adriana Nina Kusuma and Neil Chatterjee

JAKARTA, Jan 15 (Reuters) - Indonesia raised more than expected in its first debt auction of 2013 on strong demand for long tenor bonds, though short-term yields jumped as investors sought higher returns to make up for a depreciating currency.

The rupiah has continued a losing streak this year, coming under pressure on worries over a current account deficit, leading some analysts to worry about a potential selloff in local currency bonds or weak demand for debt auctions.

Instead Indonesia’s finance ministry raised 9 trillion rupiah ($934.09 million) on Tuesday, above a target of 7 trillion, with incoming bids of 17.8 trillion rupiah nearly twice as high as the previous December auction, showing investors are still keen.

However, that compares with a record 50 trillion rupiah of bids this time last year after Indonesia got a second stamp of approval as an investment grade sovereign, highlighting the reduced appeal of the country now due to the weaker rupiah.

“Today’s strong result showed that interest for carry remains. But that is unlikely to ease downward pressure on the rupiah yet, given strong onshore dollar bids ... We need to see significant improvement in current account and slower inflation to support the rupiah,” said Enrico Tanuwidjaja, an economist at the Royal Bank of Scotland in Singapore.

Yields for three-month treasury bills in the auction surged to 3.995 percent while 1-year T-bill yields rose to 4.328 percent, versus 1.951 percent and 4.219 percent a month ago. The 3-month yield was above the expectations of Bank Danamon.

Since that last auction the rupiah has lost 0.5 percent and volatility increased sharply as selling pressure meets a central bank intervening to keep it above 9,700 to the dollar. The rupiah gained after the auction to end Tuesday little changed.

“The dollar/rupiah may potentially fall with the bond sale. But that could only be temporary. The dollar demand by local corporates may still be strong,” said Saktiandi Supaat, head of FX research for Maybank in Singapore.

Most demand in the auction was at the long-end of the curve, with the highest bid-cover ratio of 5.7 for the benchmark 10-year bond and the highest amount raised for the 20-year tenor. Longer tenor yields were little changed since the last auction but in line with market prices after a recent spike in yields.

Indonesia is among the fastest growing nations in Asia and may analysts predict it will become a top 10 economy in coming decades, driven by domestic demand among the world’s fourth largest population. Those prospects combined with steadily falling government debt and political stability have driven record foreign debt ownership and record direct investment.

“The (auction) result also could be an effect of January when funds usually pile up in the beginning of a year as they go in search for higher yields,” said Maybank’s Supaat. ($1 = 9,635 rupiah) (Additional reporting by Rieka Rahadiana and Andjarsari Paramaditha in Jakarta and Jongwoo Cheon in Singapore; Editing by Jeremy Laurence)

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