Bahana Macrosight: Shrugging off fears of another ‘Taper Tantrum’
US policymakers affirm the continuation of stimulus
We expect global liquidity to remain the most influential factor moving the markets in 2021. Amid recent sell-offs in IDR currency and bond markets, there might actually lie a strong buy-on-dip signal coming from the US. From the Federal Reserve, Chairman Jerome Powell has recently stated the time to raise US interest rates was “no time soon”. From the US Treasury, Secretary nominee Janet Yellen urged lawmakers to “act big” on economic stimulus. Also note that both officials emphasized the changing nature of the global economy, particularly on how policymakers should view inflation (Powell) as well as interest rates and debt burden (Yellen). With both US fiscal and monetary policymakers showing intentions to deviate from conventional economics textbooks, we could expect more positive surprises for the global economy, particularly in terms of liquidity support. This should brush off any concern the global economy may repeat the “2013 Taper Tantrum”, or when the pullback signal of US monetary stimulus caused a spike in short-term interest rates and derailed economic recovery momentum.
Why is this important for Indonesia?
Any hints of a US stimulus pullback may hurt Indonesia more than any other emerging market peers, given the local currency’s sensitivity to US interest rates. Historically, the IDR generate -3.4% return when US yields rise rapidly, the worst among nine EM currencies tracked by Bloomberg. But the opposite could also be true: Indonesian assets will outperform their EM peers in a risk-on sentiment, particularly if the global economy remains awash with excess liquidity as the Fed continues buying bonds aggressively while the US treasury passes large stimulus bills. We would also highlight the recent uptick in US treasury yields might be driven by cyclical reflation trade – not necessarily preluding a sustained upward trajectory in US yields. In fact, the surge in US yields (US 10-year yield has breached 1% for the first time in nine months) has not been accompanied by rising volatility, with the CBOE VIX volatility index remaining stable at 20-24, compared to 40.28 in October. Our view here is US yields may continue to stay low for some time as the Fed, recognizing the US Treasury’s high borrowing needs, would want to keep borrowing costs low and may even resort to yield controls.
Longer-tenor bonds and corporate debt may be the assets to chase
Indonesia’s fixed-income market is unique in the sense that the yield curve generally steepens, rather than flattening, in a risk-averse macro backdrop. During bleak economic conditions, usually the yield curve flattens as theoretically investors rush into long-term notes to avoid short-term risks. But in Indonesia, the yield curve has steepened since 2020 as banks – currently the biggest holders of government bonds – pile into short-term notes to manage their liquidity, as they held back from disbursing lending. With Indonesian banks being a bigger and more active player in the front-end of the yield curve, it makes sense to factor that the economic rebound in 2021 would lead to stronger credit growth and returning foreign inflows. This should charm the back-end of the yield curve, or the long-tenor bond market currently controlled by insurance firms, pension funds, and foreign investors. Our favourite asset picks here are longer tenor corporate debts (5-10 years or longer), both for the AAA-rated and high-yield that should outperform in a risk-on world awash with excess liquidity. We also like IDR bonds more than USD notes, as we expect the risk-on world to drive up demand for EM local currency notes.