Fixed Income Update 12 Mar 2026
KBVS WEEKLY FIXED INCOME UPDATE
Thursday, 12 March 2026
Higher-for-Longer Global Rates and Domestic Fiscal Risks Weigh on Markets
Inflation concerns continue to increase the risk that the Federal Reserve may maintain a relatively hawkish policy stance, although signs of a weakening labor market still leave room for potential rate cuts. Market pricing suggests the first rate cut toward the 3.25%–3.50% range could occur at the September 2026 FOMC meeting, with a probability of around 43%. Meanwhile, the U.S. Dollar Index rebounded to 98.9 amid persistently high U.S. interest rates, supporting Dollar strength. At the same time, rising inflation expectations and concerns over a softer labor market have narrowed the long–short yield spread, particularly in the U.S. 10Y–2Y Treasury curve.
Domestically, rising inflation expectations and concerns over a widening fiscal deficit remain key risks for the market. In Feb ‘26, central government expenditure surged 41.9% YoY to IDR493.8 trillion, largely driven by front-loaded budget execution by ministries and agencies (K/L), which jumped 85.4% YoY. This development may intensify SBN supply pressure in 1H26, raising concerns over duration positioning in the bond market. At the same time, growing energy subsidy pressures—similar to those seen in 2022—warrant close attention. A sustained increase in subsidies could widen the fiscal deficit, add to inflationary pressures, and prompt a more hawkish response from Bank Indonesia through higher policy rates.
Regards,
KBVS Research Team