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Investors should buy Indonesia’s long-term rupiah bonds to profit as the nation’s credit ratings are raised to investment grade by the end of next year, according to HSBC Holdings, Europe’s biggest bank.

Bonds maturing in 10 to 20 years will also benefit from a strengthening of the rupiah as “moderate” inflation gives the central bank room to hold off from raising interest rates, HSBC said. The currency has strengthened 0.6 percent to 9,335 per dollar this year, building on a 16 percent gain in 2009 that made it Asia’s best performer.

“The Indonesian sovereign can achieve investment status by 2011, if the external profile and public sector finances sustain their existing trajectories,” HSBC analysts including Daniel Hui, Virgil Esguerra and Wellian Wiranto wrote in a research note on Friday. “Indonesia is sitting in a sweet spot, across the macro, currency and bond perspectives.”

Indonesia’s 10-year government bonds have returned 4.1 percent this year, according to Bloomberg data. The yield on the 11 percent note due November 2020 fell 40 basis points in that time to close on Thursday at 9.80 percent, the highest rate available in Asia’s 10 largest economies and almost triple the 3.65 percent offered by similar-maturity US Treasuries.

The notes remain “attractive” given the yield premium on offer, the HSBC report said.

Indonesia’s debt is this year’s best performer among Asia’s 10 largest economies excluding Japan, having returned 3.1 percent, based on HSBC local-currency bond indexes. Last year’s 22 percent advance was also the region’s biggest gain.

Fitch Ratings on Jan. 25 raised its credit rating for Indonesia by a notch to BB+, one level below investment grade, citing the economy’s resilience to the global crisis and improved finances. Moody’s Investors Service ranks Indonesia at Ba2 and Standard & Poor’s at BB-, two and three levels below investment grade, respectively.

An advance in the rupiah is being supported by the “permissiveness” of the nation’s exchange-rate policy, which is tolerant of currency appreciation, HSBC said.

Central bank Deputy Governor Budi Mulya said on Thursday that the rupiah may further strengthen, reiterating comments made on Jan. 7. The rupiah will rise 4.5 percent to 8,933 by the end of 2010, according to the median estimate of analysts in a Bloomberg survey.

HSBC also said it lowered its 2010 inflation forecast for Indonesia to 5.4 percent, from 6.8 percent, to reflect delays in raising energy prices. Bank Indonesia is likely to wait until September before raising its benchmark interest rate of 6.5 percent, the bank said, forecasting increases of 1 percent point for 2010 and a half point in 2011.

The $514 billion economy, Southeast Asia’s largest, is forecast to expand 5.8 percent this year following a 4.5 percent expansion in 2009, HSBC said.

Foreign investors’ holdings of Indonesian bonds stood at Rp 119 trillion ($12.8 billion) as of Feb. 18, up from Rp 108 trillion at the end of last year, according to the Finance Ministry.



Bloomberg