The Effect of Inflation, US Treasury Yield and the Credit Default Swap of Government of Indonesia on USD Denominated Indonesian Government Bond Yield
Satryo Aji Wibowo, Ririen Setiati Riyanti

Department of Management, Faculty of Economics and Business, Universitas Indonesia

Abstract

Indonesian government relies heavily on bond to finance its budget deficit and hence its position as a financing instrument has become increasingly important. While USD denominated Indonesian government bond only represents circa 14% of government bond issuance, its position in the whole government financing scheme is still important. It is therefore useful for the Indonesian government and investors to understand the factors affecting the yield of these bonds. This study focuses to examine whether inflation, US Treasury yield and Credit Default Swap (CDS) spread have significant effects on USD denominated Indonesian government bond yield. The study uses data obtained from Bloomberg, Ministry of Finance, and Bank Indonesia from January 2010 to December 2020. The dependent variable used in this study is the 10-year USD Indonesian government bond yield while the independent variables consist of 10-year US treasury yield, 10-year Government of Indonesia CDS level and Indonesia headline inflation level which measures the change in Consumer Price Index every month on year-on-year basis. The study will use Ordinary Least Square (OLS) method to determine the influence of these independent variables on the 10-year USD denominated Indonesian government bond yield. Further regression methods such as Autoregressive Conditional Heteroscedasticity (ARCH) and Generalized Autoregressive Conditional Heteroscedasticity (GARCH) will be employed to deal with autocorrelation issues. The results of the study finds that inflation, US Treasury yield and Government of Indonesia CDS level all have significant effect on USD denominated Indonesian government bond yield. In general, the results from the regression model are in-line with the hypothesis and theoretical framework. The model generated from this study can provide a guidance to both investors and the government on the optimal level of USD denominated Indonesian government bond yield.

Keywords: Bond yield, CDS, government bond, inflation, US Treasury

Topic: Corporate Finance