Recasts, adds investor bids in paragraph 3

By Rae Wee and Yantoultra Ngui

SINGAPORE, June 11 (Reuters) - A unit of Indonesia's sovereign wealth fund Danantara has launched its debut dollar bond sale, which sources said could raise as much as $1 billion, in a major test of foreign investor appetite amid growing challenges in Southeast Asia's largest economy.

Danantara Investment Management started marketing the dollar bonds in five- and 10-year tranches on Thursday, and is aiming to raise about $500 million from each tranche, three sources with knowledge of the matter said.

Investor bids for those bonds exceeded $1.5 billion as of the Asian afternoon, one of the sources said. All the sources declined to be named as they were not authorised to speak to the media.

Danantara did not respond to an emailed request by Reuters for comment.

The debt sale comes at a crucial time for Indonesia, as investors, worried about a free-falling rupiah IDR= and President Prabowo Subianto's populist policies, cool on Indonesian assets.

Bank Indonesia on Tuesday raised the benchmark interest rate by 25 basis points in a rare off-cycle move to 5.50% to try to stabilise the rupiah after the currency hit a series of record lows.

Concerns are also mounting over Danantara's expanding mandate, with the sovereign wealth fund most recently tasked to become the sole exporter of palm oil, coal and ferroalloys from as early as September under a newly established unit.

Danantara was launched by Prabowo in ​February 2025 and reports directly to ⁠the president.

Danantara Investment Management set initial price guidance for its dollar bonds at around 5.70% for the five-year notes and about 6.30% for the 10-year notes, according to a term sheet seen by Reuters.

The country's sovereign dollar debt due in 2036 455780EJ1= was last trading at 5.6%, while state firm Pertamina's dollar debt due in 2031 traded at 5.27% 69370PAL5=, based on LSEG data.

The pricing for the Danantara bonds is expected to be fixed later on Thursday.

Proceeds from the dollar bond sales will be used for general corporate purposes, including investments and refinancing existing debt, according to the sovereign wealth fund's marketing term sheet.

The bonds are set to be issued under its $5 billion global medium-term note programme, and are expected to be rated "Baa2" by Moody's and "BBB" by S&P and Fitch.

Citigroup C.N, DBS DBSM.SI, HSBC HSBA.L, Mandiri Securities and Standard Chartered STAN.L have been hired as joint bookrunners and joint lead managers for the deal, the term sheet showed.