The government will conduct another regular auction bond today, on 26-Aug, targeting Rp27tn (max. Rp40.5tn), offering two SPN series and six reopened FR series (5-yr FR109, 10-yr FR0108, 15-yr FR106, 20-yr FR107, 29-yr FR102, and 39-yr FR0105). We expect the robust demand to continue, following BI’s recent rate cut, with the total incoming bids projected at Rp162tn (range: Rp157tn–167tn). The demand will be supported by ample domestic liquidity, reinvestment flows, and global risk-on sentiment, following Powell’s dovish Jackson Hole remarks. However, compressed bond yield levels may act as the only limiting factor compared to the historic record seen earlier this month. There is potential for a decline in non-competitive bids now that the newly issued 5-year FR109n series has already been trading actively in the secondary market.

Demand hits record high, led by the new 5-yr FR109. The government’s latest conventional bond auction (12-Aug) delivered a historic outcome, with the total incoming bids surging to Rp162.3tn—the highest ever recorded. This was compared to Rp106.5tn in the prior auction (29-Jul) and well above the YTD average of Rp87.3tn, and it also beat our Rp110tn forecast (range Rp100tn–120tn). The demand was led by the newly offered 5-yr FR109, which drew Rp88.1tn (54% of total bids), followed by the 10.7-yr FR108 (Rp34.0tn) and the 15-yr FR106 (Rp13.3tn). Onshore investors remained dominant, with bids jumping to Rp128.2tn (79% of total) from Rp84tn in the previous auction. Offshore demand also rose 52% to Rp34.1tn, though the awarded amount was only Rp3.5tn. This lowered the foreign award-to-bid ratio to 10% (vs. 37% prior, YTD avg.: 35%).

The government issued Rp32tn, with a lower cost of funds and shorter tenors. Supported by strong investor demand, the government maintained its issuance at Rp32tn, in line with the previous auction and above the initial target of Rp27tn, supported by strong investor demand. Importantly, the weighted average cost of funds declined to 6.35% (vs. 6.54% in the prior auction), reflecting lower yields achieved across awarded series. At the same time, the average tenor shortened to 12.3 years (vs. 14.2 years previously). Thus, the YTD gross issuance has reached Rp903.5tn, or 65.8% of our full-year target (based on a -2.78% deficit-to-GDP ratio).

Onshore banks posted a net buy of 48.5% of the total awarded in the last conventional bond auction. Based on our calculation, in the last conventional bond auction on 12-Aug, onshore banks remained the largest type of net buyers, absorbing 48.5% of the total awarded. They recorded a net buy of Rp15.5tn, broadly in line with the prior auction on 29-Jul (Rp15.4tn) and above the YTD average of Rp12.9tn per auction. Foreign investors ranked second, with their net buy rising to Rp8.3tn (vs. Rp4.1tn in the prior auction, and a YTD average of Rp6.3tn). Insurance and pension funds also participated actively, but on a smaller scale. Furthermore, year-to-date, onshore banks have been the biggest type of net buyer in the primary market, with a net buy of almost Rp193tn, or 43.8% of the total conventional bond issuance through auction, followed by foreign investors and insurance & pension funds, which reported net buys of Rp94.5tn and Rp60.2tn, respectively. Nevertheless, including the secondary market and maturing bonds, YTD, onshore banks have only reported a net buy of Rp35.9tn. The biggest net buyer of conventional bonds has been Bank Indonesia, which reported a net buy of +Rp115.8tn YTD, followed by foreign investors and insurance & pension funds, which reported net buys of +Rp65.4tn and +Rp56.7tn, respectively, according to the bond fund flow data from the DMO, based on the settlement date of 21-Aug-2025.

Expecting robust demand to continue after BI’s rate cut. We expect the robust demand to continue, following BI’s rate cut, with incoming bids projected at Rp162tn (range: Rp157tn–167tn). Four factors should support the strong demand: 1) Ample liquidity: The banking system’s liquidity remains flush at Rp128.6tn as of 25-Aug (vs. Rp123.3tn in the previous auction), potentially causing an increase in short-term tenor series. 2) This week, there will be Rp4.3tn in maturing bonds, plus coupon payments totaling Rp1tn, providing reinvestment demand. 3) The SRBI yields and outstanding balances have continued to decline, indicating a possible shift in investor appetite back toward longer-term government bonds. 4) Supportive global sentiment: A risk-on backdrop across global and regional markets, following Powell’s dovish Jackson Hole remarks, should help sustain foreign investor interest in local-currency sovereign instruments. The negative sentiment might be coming from entry-level bond yields, as they have already dropped quite significantly, on average by 22 bps in the last month and -69 bps YTD. There is potential for a decline in non-competitive bids as the new 5-year FR109 is now actively traded in the secondary market. In earlier auctions, uncertainty around the pricing of new issues led investors to lean on non-competitive bids, often inflating bid sizes, given historically low allocation ratios. With a clearer benchmark yield now established, reliance on non-competitive channels may ease in this auction.

The rupiah yield curve has bullish steepened. Compared to the previous conventional bond auction on 12-Aug, the rupiah yield curve has bullish steepened: the 2-yr yield decreased more by 24 bps to 5.37%, and the 10-yr yield decreased by 11 bps to 6.41%. We forecast the fair yields of the bond series to be auctioned today as follows: 4.95% (range: 4.90-5.00%) for the 3-mo SPN, 5.05% (range: 5.00-5.10%) for the 1-yr SPN, 5.73% (range: 5.68-5.78%) for the 5-yr FR0109, 6.33% (range: 6.28-6.38%) for the 10-yr FR0108, 6.67% (range: 6.62-6.72%) for the 15-yr FR106, 6.80% (range: 6.75-6.85%) for the 20-yr FR107, 6.85% (range: 6.80-6.90%) for the 29-yr FR102, and 6.90% (range: 6.85-6.95%) for the 39-yr FR0105.