Bids for Indonesia’s sovereign bonds at an auction soared the highest in almost two years, with supply getting cut and the central bank already signaling peak policy rates.

In line with government efforts to cut debt sales, Indonesia issued 7 trillion rupiah ($471 million) of Islamic-linked finance on Tuesday, below the 9 trillion rupiah indicative target. It received 60 trillion rupiah worth of bids in the auction, the biggest demand since November 2021, according to data compiled by Bloomberg.

It’s the fourth straight auction below target after the government indicated it will reduce sales this year following a string of budget surpluses. Healthy government cash balances, along with a central bank that has ended its hiking cycle as inflation moderates, make Indonesian government bonds attractive.

“All those factors really make Indonesian assets, from a risk reward perspective, one of the better placed fixed income markets right now,” said Prashant Singh, a senior portfolio manager at Neuberger Berman in Singapore. “We find value on all segments of the curve.”

The demand added a fillip to the rally in Indonesian debt — which are often seen as a benchmark for emerging market risk appetite — that’s offered dollar-based investors a total return of almost 11% this year, the best in emerging Asia. The yield on benchmark 10-year notes edged one basis point lower to 6.34% in early trading Wednesday, the lowest since January 2022.

That rally however may subside given foreign flows could moderate with the risk of more Federal Reserve rate hikes, Barclays strategists Audrey Ong and Ashish Agrawal wrote in a note to clients.

“We expect Indo government bonds to cheapen, reflecting no incremental tailwinds from global rates and valuations having richened following the recent rally,” according to the note.

--With assistance from Marcus Wong.