Indonesia C.Bank Aims to Cap Excessive Bond Yield Rise in 2023 -Governor

CENTRAL BANK - JAKARTA. Indonesia's central bank aims to ensure a rise in government bond yields in 2023 won't be excessive, seeking to keep the 10-year bond yields below 7.9% on average next year, its governor told a parliamentary hearing on Wednesday.

Perry Warjiyo said Bank Indonesia (BI) intends to cap yields via "operation twist" - BI's operation in the bond market whereby it sells short-dated government bonds to raise their yields and make them more attractive to foreign investors, while buying long-dated bonds to help the government control borrowing costs.

The 7.9% yield level that Warjiyo referred to is the government's formal assumption in its 2023 budget for average bond yields next year.

"If we leave it to the market, the yield could rise to 8% or more. But with our purchases in the secondary market ... the rise in yield does not have to be too high," he said, using an assumption that market may ask for a 400 basis point spread above U.S. Treasury yields.

BI introduced operation twist this year to unwind some of the government bonds it accumulated during the COVID-19 pandemic, when it adopted an ultra-loose monetary policy to help Southeast Asia's largest economy navigate the health and economic crises.

Warjiyo earlier this week told lawmakers BI had bought 974.09 trillion rupiah ($62.04 billion) worth of bonds in the primary market since 2020 and this will likely increase to 1,144 trillion rupiah by the end of the year.

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To comply with the law, BI will no longer buy bonds in the primary market starting next year, but will continue its operation in the secondary market, the governor said.

Officials at the central bank have not disclosed details of operation twist, but BI's head of monetary management department Edi Susianto told Reuters in September that on a net basis it must be in line with the bank's contractionary policy.

BI has raised its key interest rate by a total of 175 basis points since August, putting the benchmark above its pre-pandemic level.