India and Indonesia have together captured almost one-fifth of emerging-market bond net inflows year-to-date through August, as investors continue to be lured by their rich yields and strong growth prospects when they were but a few years ago considered among the most vulnerable in the emerging markets.

Between the 2 countries, Indian bonds are offering the highest real yields over Indonesian debt since 2015, due to expectations of a divergence in policy stimulus.  Both nations are rated at BBB minus by S&P Global Ratings, with a stable outlook, whereas yields on India and Indonesian 10-year bonds are at 6.63% and 6.27% respectively, the highest in Asia.  Adjusting for inflation, where in India has averaged just 2.47% in the past five months, compared with Indonesia’s 4.11%, the yield advantage that India’s 10-year notes offer over Indonesia’s have widened to 202 bps, the most since April 2015.  Just last November, the reverse was true, with a difference between the 2 yields as low as -400 bps.

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