Fixed Income Update 21 May 2026
KBVS WEEKLY FIXED INCOME UPDATE
Thursday, 21 May 2026
Entering a Hawkish Phase Amid Mounting Macro Risks
Trump paused the resumed strikes after Iran submitted a new proposal, while the US signaled a softer stance through discussions on releasing part of Iran’s frozen funds and allowing more flexibility for IAEA-supervised enrichment. However, US–China summit showed limited alignment. Markets remain hawkish, with Fed Funds Futures implying a 96.7% probability of a rate hold at 350–375 bps at the Jun ‘26 FOMC meeting, while rate cut expectations remain deferred throughout 2026.
Domestically, Bank Indonesia raised the BI Rate by 50 bps to 5.25%, which in our view signals central bank independence amid Rupiah pressure and weakening market confidence. On fiscal side, although the fiscal deficit remained manageable at 0.64% of GDP through Apr ‘26, fiscal pressure continued to rise as expenditure surged 34.3% YoY due to MBG, social assistance, and energy subsidies, while interest payments jumped 26% YoY. Indonesia’s external debt reached USD433.4 bn (29.5% of GDP), with 81.7% denominated in foreign currency, increasing vulnerability to Rupiah depreciation.
President Prabowo also established PT Danantara Sumber Daya Indonesia, requiring coal, CPO, and ferro-alloy exports to pass through SOE exporters with DHE proceeds retained domestically. While aimed at strengthening FX stability, the policy may pressure private sector margins and carries elevated execution risks.
Regards,
KBVS Research Team