BII Weekly Bond Report - 22 Jul 14

Strengthening amid higher tension of domestic politic condition ahead official president election result

GLOBAL MARKET UPDATE

Fed remains dovish and US data review. Yellen gave a rather similar testimony in the semi-annual testimony to the US Senate Committee last week. In regards to Fed Fund Rate (FFR) hike, she reiterated that FFR would likely to stay low for a “considerable period” once the Fed ends its QE3 program yet she also said that “if the labour market continues to improve more quickly than anticipated by the [FOMC] committee, resulting in faster convergence toward our dual objectives, then increases in the FFR target likely would occur sooner and be more rapid than currently envisioned.” Which is a short term FFR hike to 1.13% by the end of 2015 and 2.50% in 2016. Not much clues were given on the second date of her testimony. 10-yr US treasury price closed at 100-02 at the end of the last week compared to 99-27^1/4 yielding 2.517% at the end of previous week.

Euro zone June CPI y-o-y remains unchanged at 0.5%. Eurostat published Euro zone June CPI y-o-y which shows an unchanged figure at 0.5%. On a m-o-m basis, inflation of 0.1% occurred in month of June from deflation of -0.1% in the month of May. Core CPI y-o-y was seen unchanged at 0.8% in June. Both CPI and Core CPI number was in line with economist consensus.

Increase in Japan industrial production and economic outlook. Japan May industrial production increased by 1.0% y-o-y from 0.8% y-o-y in April. The industrial index measures the volume of the output of industrial establishment in the mining and quarrying, manufacturing and public utilities industries. Japan government upgraded their economic outlook as consumer continues to recover after a sales tax raise to 8% from 5% percent in April 2014. If Japan economy continues to improve than most of the economist urge Japan government to increase its sales tax to 10% in 2015.

China GDP growth slightly increased while liquidity accelerated. China 2Q GDP grew by 7.5% y-o-y from 7.4% y-o-y in 1Q. GDP growth around 7.5% y-o-y is considered to be acceptable according to Chinese premier Li Keqiang as long as it creates new jobs and higher wages. China money supply accelerated in faster pace in June as the money supply M2 rose at annual pace of 14.7%.

DOMESTIC MARKET UPDATE

Awaiting KPU official result. Both candidates claim victorious in Indonesia presidential election. The claim was based on quick count result conducted by various polling agency. Most of the reputable polling agency shows that Joko Widodo and Jusuf Kalla won the presidential race while other non-reputable polling agency indicates Prabowo’s winning. Hence, KPU will release the official result in regards to who will be the 7^th Indonesia president. Based on precedent, all the reputable polling agency such as SMRC, RRI, CSIS-cyrus and etc are proven accurate at least till April legislative election. Will the quick count result vary from KPU official result? In our view: This is what investors are waiting and holding themselves for continues investing in Indonesia bond market. Yet, we still believe that final official result would announce Jokowi – JK as the next Indonesia president. As of Friday, according to kawalpemilu.org, a website that tracks actual results at polling stations that are uploaded to the KPU website, Jokowi secured 52.80% of the 128.49 mn votes counted. What’s next? Prabowo might challenge KPU final result in the constitutional court if he losses as he has invested too much time and money in the 2014 election. This would result in Jokowi not being able to declare victory till august even if KPU announce Jokowi as the winner on July 22^nd. Previous concern of parliament not supporting Jokowi would vanish since Partai Golkar and Demokrat might shift their support to Jokowi if he wins. Yet, no official statements have been given by any official of the parties.

Indonesia central bank expectation on key economic data. Central bank governor comments on upcoming June trade balance data release at around deficit of US$300 mn. Note that cumulative trade balance till May (publication in July) is still deficit of US$863 mn which is still better compared to the cumulative trade balance of the same period last year of US$2,057 mn. July inflation is expected to pick up to around 0.8% to 1.2% m-o-m due to Ramadan price pressures while on y-o-y basis, July inflation would ease down to 4.4% as last year subsidized fuel price hike effect towards inflation vanishes. On FY2014, inflation is expected to be around 5.31% due to an increase in power tariff rates and LPG prices while FY2014 GDP growth is expected to be between 5.1% - 5.5% as domestic consumption eases down and slowing government spending.

Another conventional auction with indicative target issuance of Rp10.0 tn. DMO will conduct its weekly auction this week with Five series to be auctioned this week are SPN12150501 (Coupon: discounted; Maturity: 1 may 2015), SPN12150710 (Coupon: discounted; Maturity: 10 Jul 2015), FR0069 (Coupon: 7.875%; Maturity: 15 Apr 2019), FR0070 (Coupon: 8.375%; Maturity: 15 Mar 2024)   and FR0068 (Coupon: 8.375%; Maturity: 15 Mar 2034). Our view on the indicative yield for the auction are as follows SPN12150501 (range: 6.600% - 6.900%), SPN12150710 (range: 6.600% - 6.900%), FR0069 (range: 7.700% – 7.900%), FR0070 (range: 7.900% – 8.150%) and FR0068 (range: 8.550% – 8.750%). Till last week, Indonesian government has raised approx. Rp16.41 tn worth of debt through bond auction in 3Q 14 which represents 17.09% of the 3Q 2014 year target of Rp96 tn.

Foreigner exited front end tenor and shifted to the belly during the month of June. Foreigner added Rp6.4 tn in the month of June or was the least buying month by foreigner compared to several months earlier. Foreigner sold Rp7.0 tn in the 1 – 2 year tenor and shifted to 2 – 5 year tenor by Rp3.5 tn, 5 – 10 year tenor by Rp2.7 tn and 15 – 20 year by Rp2.8 tn. From the start of the month till July 17^th, foreigner just added Rp1.8 tn in Indonesia bond market and was mostly buying bond with tenor between 10 – 15 year. Foreign ownership proportions continue increasing to 35.63% of total outstanding government bond as of July 10^th. We don’t see any significant inflow during this month considering upcoming Ramadan festival where Indonesia bond market would be closed for a full week.

Further this week, we see that Indonesia bond market would continue moving sideways with slightly positive tendency and secondary market trading volume would be rather thin as we believe investors would not aggressively enter bond market since Indonesia bond market would be closed from 28 Jul – 1 Aug due to Ramadan festival. Even if KPU announce Jokowi winning in the presidential race, we see Indonesia bond market would only be indulge in positive euphoria and might experience 10-yr bond yield below 8% just for some day.

BOND MARKET REVIEW

Bond market booked gain on the expectation of Jokowi’s win. Indonesia bond market moved slightly higher during last week amid sideways trend. There weren’t any economic data publication or any market sentiment that could move the market. Bond prices moved higher only after kawalpemilu.org, shows Jokowi winning the presidential race. Jokowi’s economic advisor in an interview told that there might not be any subsidize fuel price hike this year. Indonesia legislative in a separated meeting last week with Indonesia finance ministry confirms that they would not grant any additional subsidized fuel volume above than the volume approved in 2014 revised budget. During last week, bonds were traded rather thin in the secondary bond market and would remain similar this week due to Eid al Fitr. Foreign Inflows remain entering Indonesia bond market as from the beginning of this month till 17 July, foreigner have added Rp1.8 tn into Indonesia bond market. Overall, bond market throughout the region moved higher with South Korea and Thailand bond market outperforming the most as the bond market rose by 0.47% and 0.46% respectively tailed by India (+0.34%), Singapore (+0.28%), Malaysia (+0.24%), Indonesia (+0.17%) and Taiwan (+0.06%) while China bond market recorded the biggest losses last week (-0.71%) followed by Philippines (-0.29.

Insignificant yield movement on the IDR segments while yield curve bull flattened on the USD segments. On the IDR segment, FR0068 (20-yr benchmark series) booked gain as the bond price reached 96.955 (+0.314 points) yielding 8.699% (-3.4bps) while FR0027 (1-yr) lost the most as the yield shifted up by 11.6bps to 6.895%. Yield spread between 10-yr benchmark series and 2-yr notes narrowed to 62.88bps (vs average YTD yield spread of 81.33bps) compared to previous week yield spread of 65.96bps. On the USD segment, yield curve bull flattened with RI0144 (30-yr) gaining the most as price moved higher by 1.27 points to 117.865. Yield spread between 10-yr and 2-yr USD Indonesia sovereign notes narrows to 289.62.4bps (vs average YTD yield spread of 325.8bps) compared to previous week yield spread of 296.5bps.

Both government and corporate segment noted thin trading volume. Total trading volume at secondary market for the government segment was noted amounting Rp31.12 tn with average trading volume per day of Rp6.22 tn (vs average per day (Jan – Jun) trading volume of Rp11.18 tn) during last week and was relatively illiquid with 393x transaction frequency on average (vs average transaction frequency per day (Jan – Jun) of 626x) with FR0068 (20-yr benchmark series) and FR0071 (15-yr benchmark series) as the most actively traded with total volume reported amounting Rp5.34 tn and Rp3.31 tn respectively. FR0068 closed at 96.955 yielding 8.699% while FR0071 closed at 103.922 yielding 8.524%. Government bond with tenor between 15 till 20 years dominates Government bond trading last week.

On the credit segment, total trading volume was noted thin as well amounting Rp2,580 bn during last week resulting in average trading volume per day of Rp515.9 bn (vs average per day (Jan – Jun) trading volume of Rp677 bn) and was relatively liquid with 79x transaction frequency on average (vs average transaction frequency per day (Jan – Jun) of 88x). BNLI01ACN1 (Shelf registration I Bank Permata Phase I year 2013; A serial bond; Maturity date: 3 Jan 2015; Rating: idAA+) was the most actively traded bond with total volume reported amounting Rp200 bn with last transacted at 100.98 yielding 7.6681%. Corporate bond with AA+ rating dominate the credit segment last week.