Narrowing Indonesia–United States 30-year Sovereign Yields Spread: Structural Analysis and Outlook
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Eco Bulletin Issue 68 Indonesia’s 30-year sovereign bond yield spread has narrowed significantly in recent years, declining from a historical average of 5–6% above US Treasury yields to around 3%, a level near two standard deviations below its long-run mean. This convergence raises important questions about whether the compression reflects structural improvements in macroeconomic credibility or is a temporary response to global conditions.
This paper addresses this gap by analyzing global and domestic policies as well as employing a VAR model to forecast Indonesia’s 30-year yield spread under baseline, upper, and lower-bound scenarios through 2026, contributing to the study on the persistence and drivers of sovereign risk pricing in emerging markets.
Historical data suggest that several favorable macroeconomic and market factors have contributed to the narrowing of Indonesia’s yield spread. Stable economic growth, a benign inflation environment, and prudent fiscal management have strengthened investor confidence and limited bond supply growth.
Structurally, several factors have contributed to the narrowing yield spread, including Indonesia’s strong macroeconomic fundamentals characterized by stable economic growth, low inflation, prudent fiscal management, and reduced external vulnerability which have collectively enhanced investor confidence and supported long-term debt sustainability.
Risk profile also contributed as increase country’s upgrade to investment-grade credit ratings (BBB-/Baa2) and falling 10-year CDS spreads signal reduced default risk. These developments reflect improved macro and fiscal Indonesia credibility, contributing to lower sovereign risk premiums.
We also find that supportive market dynamics have contributed to the narrowing yield spread. Increased domestic bond ownership driven by Bank Indonesia’s burden-sharing arrangement and declining foreign holdings have enhanced market stability. Together with ample liquidity and Indonesia’s inclusion in major global bond indices, these factors have maintained strong investor demand and helped compress long-term yields, even amid global monetary tightening.
This study finds that the narrowing of Indonesia’s 30-year sovereign yield spread is likely to persist through late 2026, indicating a shift toward lower perceived sovereign risk, underpinned by stronger structural fundamentals in both macroeconomic and credit dimensions of Indonesia.
This study highlights that this compression is not guaranteed to be permanent, as it remains susceptible to global financial shocks. The upper- and lower-bound scenarios presented illustrate the extent of potential deviation. While a return to historical spread levels appears unlikely, maintaining this “new normal” will depend on Indonesia’s continued fiscal prudence and resilience to external volatility.
