- After FOMC meeting in March 2021, the upward trend in US treasury yields continued, along with the strengthening of the USD.
- The Fed will not raise interest rate in the short term; however, the market is moving based on the prediction that Fed Funds Rate (FFR) will increase in 2023.
- Operation Twist (the Fed buys longer-duration bonds and sells the short-term bills) could be the key for controlling US treasury yields, but there is no clear commitment from the Fed regarding this policy.
- Although quantitative easing program continues, the Fed’s liquidity injection for the US real economy and other central banks outside the US (via swap/repo facilities) has been much reduced compared to the beginning of pandemic.
- The increase in inflation and US treasury yields eventually drive capital flows back to the core countries (US), thereby depressing the exchange rate and government bonds in periphery countries (including Indonesia.
- This means that the global economic recovery in 2021 will not necessarily be accompanied by capital inflows to Indonesia. This will have a negative impact on the balance of payments and Rupiah, especially when combined with an increase in the current account deficit.
