January 09, 2025

Concerning Yield Spike

Market Commentary

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As of 9th January, JCI ranked number 8 as the best YTD performer among APAC indices despite losing c. 0.1%. This achievement is actually bias considering that JCI was only supported by several big cap stocks such as BREN, GOTO and PANI.

Asia Pacific Indices

If BREN, PANI, and GOTO underperformed YTD, the JCI would likely face a sharper downturn, reflecting the critical role these stocks play in maintaining market resilience and attracting investor interest.

JCI Index

In our view, one of the main cause of this weak performance is the US Treasury yield spike.

U.S. Treasuries, particularly the 10-year yield, are considered risk-free investments. When yields are high, they offer compelling returns without the risks inherent in equities. Investors might prefer locking in high Treasury yields rather than taking on the volatility of equity markets.

Investors are wary of potential inflationary pressures, especially with anticipated policies from the incoming administration, such as trade tariffs and fiscal stimulus. Higher inflation expectations diminish the appeal of fixed-income securities, prompting a rise in yields to compensate for the decreased purchasing power.

Federal Reserve Chair Jerome Powell recently indicated that the pace of interest rate cuts in 2025 will be slower than previously anticipated.

This adjustment is attributed to persistent inflationary pressures that have not diminished as expected. Consequently, the Federal Reserve has revised its monetary policy strategy, opting for a more gradual reduction in rates to ensure that inflation moves closer to the 2% target.

This policy shift suggests that borrowers and investors should prepare for a prolonged period of higher interest rates, as the Federal Reserve remains vigilant in its efforts to combat inflation.

Meanwhile, Indonesia's 10-year government bond yield stands at approximately 7.2% as of January 9th. When combined with high U.S. Treasury yields, which offer competitive returns with minimal risk, the appeal of Indonesian equities diminishes further.

Investors may prefer the stability of government bonds over the inherent volatility of the equity market amidst current unstable geopolitical tension, leading to reduced demand for stocks and exerting downward pressure on stock prices.

Indonesia 10 Year Government Bond Yield

Taking all these factors into account, the US dollar is likely to remain strong, much like interest rates. Therefore, investors may need to prepare for the worst and focus on selecting more defensive stocks as uncertainties persist.

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January 09, 2025

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