Bank Indonesia kept its 2026 growth forecast at 4.9%–5.7% and maintained an inflation target range of 1.5%–3.5%. Inflation risks are described as skewed to the upside if the economy runs hotter and the output gap narrows, which could weaken the rupiah.
Demand at recent bond auctions eased, with the 18 February auction posting a 10‑year bid‑to‑cover ratio of 1.71x, the lowest since March 2025 and below average 2024–2025 levels. The 5‑year tenor recorded a bid‑to‑cover ratio of 1.47x, the lowest since May 2024.
Rising Yields And Rupiah Pressure
A model assessment described 10‑year government bonds as overvalued versus macro fundamentals, while technical indicators point to higher bond yields. These conditions add pressure on the rupiah and complicate Bank Indonesia’s policy choices as it considers gradual easing.
SRBI outstanding has risen on a net basis since November 2025, and SRBI yields increased by about 11–14bp since September last year. Non-resident inflows to SRBI have picked up modestly since December, partly offsetting foreign outflows from equities and government bonds.
Bank Indonesia is holding its 2026 growth forecast between 4.9% and 5.7%, but we are more focused on the inflation risks. The latest data for January 2026 showed headline inflation ticking up to 3.6%, just pushing past the central bank’s 1.5%-3.5% target ceiling. This upward pressure on prices, if the economy runs too hot, creates a significant headwind for the Rupiah.
The government bond market is already showing signs of stress, which points to a clear trading signal. The bond auction on February 18th saw a bid-to-cover ratio of only 1.71x, a concerningly low figure that continues the weak demand trend we saw through late 2025. This suggests that bond yields, which are currently around 6.8% for the 10-year, are likely to climb higher as prices fall.
Trading Implications For Rates And FX
Given that models suggest 10-year bonds are overvalued relative to these fundamentals, derivatives traders should consider strategies that benefit from rising Indonesian yields. This could involve using interest rate swaps or options to position for a move toward the 7.0% level in the coming weeks. We believe current bond prices do not adequately reflect the rising inflation and weakening foreign demand.
These domestic pressures are likely to weigh on the Rupiah, making short positions on the currency look attractive. With USD/IDR currently trading near 16,100, continued capital outflows from the bond market could push the pair towards the 16,350 resistance level we last tested in October 2025. Buying USD/IDR call options could be an effective way to play this expected weakness while managing risk.
We note that Bank Indonesia’s securities, the SRBI, have attracted some modest foreign inflows since December, supported by rising yields on those instruments. This has provided a small buffer for the Rupiah against outflows from government bonds and equities. However, these SRBI inflows are not substantial enough to reverse the broader bearish sentiment.
