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Many Indonesian bond holders are closely watching the current decline in the country's benchmark yields. Indonesia's yield curve fell to its lowest level in more than a year this month as inflation slowed more than expected. According to local experts, Indonesia's central bank will begin cutting interest rates in the second half of this year by about 75 basis points.

Traders are now betting that the Bank of Indonesia will become one of the first emerging Asian central banks to cut rates after a precipitous 225-basis-point rise from August through January. This is all aimed at curbing consumer spending and maintaining the local currency. The Bank of Indonesia has since turned its attention to these measures as the country's inflation rate has fallen to its 2%-4% target range and the rupiah has strengthened more than any of Asia's major currencies this year.

According to our experts, given a favourable domestic inflation outlook and a relatively stable rupiah, Indonesian government bonds, in our view, remain among the most attractive in terms of local currency yields. A nearly 5% appreciation of the rupiah against the dollar in 2023 means that the Bank of Indonesia is well positioned to cut rates without fear of excessive currency weakening. Indonesian bonds have also delivered a total return of 10% to their dollar investors this year, the best among developing Asian countries.