Investor appetite for emerging market assets has been in decline over the past few years as the US Federal Reserve has been focusing on a tighter monetary approach since May 2013, resulting in the reversal of (cheap) US dollar flows to emerging markets. After the US quantitative easing program ended, investors have been in wait-and-see mode anticipating the timing of higher US interest rates. Based on statements from Federal Reserve officials, including Chief Janet Yellen, and recent US macroeconomic data, US interest rates are expected to raise in the fourth quarter of 2015. Next week, the US central bank will meet again to discuss its monetary policy.

Other matters also contribute to this situation. Sluggish global economic growth and the recent crisis in the Eurozone (the Greek debt crisis) increase investors’ appetite for shorter-term tenor assets.

Joint book-runners for Indonesia’s latest euro-denominated bond auction were Deutsche Bank, Societe Generale and Standard Chartered Bank. The sale was managed by Bahana Securities, Danareksa Sekuritas and Mandiri Sekuritas.

Data from the Indonesia Bond Pricing Agency (IBPA) show that 10-year rupiah-denominated government bonds yielded 8.3036 percent at the secondary market on Friday (24/07). Slowing economic growth (at a six-year low), accelerating inflation (7.26 percent y/y in June 2015) and a heavily depreciating rupiah have caused diminished demand for rupiah-denominated bonds. Moreover, the high level of foreign ownership of Indonesian bonds (nearly 40 percent) makes the country highly vulnerable to a US interest rate hike.

A bond issuance helps to finance the government’s budget. Indonesia targets a deficit of IDR 222.5 trillion (approx. USD $16.6 billion) in 2015, or 1.9 percent of the country’s gross domestic product (GDP), down from 2.4 percent of GDP one year earlier.