BII Weekly Bond Report - 26 Aug 14

Tight Range yet Positive Tendency on the Back of Lower Inflation and Surplus Trade Balance Expectation

GLOBAL MARKET UPDATE

Can we consider Fed to be hawkish? Based on the Fed minutes results, most of FOMC members agree that US economy is indeed improving and would continue moving positive. Therefore FFR hike may arrive sooner than what the market has expected. The answer to when will FFR rise is not yet clear but the guideline in the minutes indicates that if economic activity, labor market and inflation continue to move as what the members are expecting than the first increase in FFR might also occur. Talking in the Jackson Hole Symposium, Fed’s Yellen did not provide any indication of being hawkish. She was rather taking the middle ground. US July CPI came in at 2.0% yoy or 0.1% mom with an increase in food and rents prices hence were offset by declining energy costs. The data publication was also in line with economist consensus. However, the figure was running below the Fed’s target as sluggish global demands have limited corporate ability to charge customers more. UST 10-yr booked losses as yield reached 2.403% on the final closing of last week trading.

Japan July trade balance deficit widens to ¥964.0 bn from deficit of ¥823.2 bn as import surge. Japan exports in July rose to ¥6.19 tn or 3.90% yoy as motor vehicles, metal working machinery and scientific optical instruments exports increases yet were offset by declines for visual apparatus. However, imports rose to ¥7.15 tn or 2.30% yoy due to purchases of oil and gas. Oil and gas imports have increased as Japan shuts their Fukushima nuclear power plant after earthquake in 2011. As a result, Japan July trade balance deficit widens to ¥964.0 bn compared to Jun trade balance deficit of ¥823.2 bn. However, On a year on year basis, Japan July trade balance narrowed by 6.60%.

China Manufacturing Index falls to 50.3. HSBC Flash China PMI declines to 50.3. A PMI number below 50 signals contraction while above it signals expansion. The released PMI shows that domestic and external new orders rose at slower rates compared to the previous month while disinflationary pressure returned as input and output prices contracted over the month. The PMI might also signal that the China economy condition is recovering with a slower pace.

DOMESTIC MARKET UPDATE

Affirmation on Mr. Jokowi becoming the Indonesia’s 7^th president. The journey that started on March 14^th, 2014 has now come to its end as constitutional court confirms Jokowi’s winning the presidential race. Jokowi is now officially the 7^th President of Republic of Indonesia. What’s next? Jokowi needs to set up his cabinet while there are some indication that he might concise his cabinet as well. Jokowi aims to reform taxation system by dividing Finance ministry into two separate ministries. While one ministry handles the state expenses another ministry should focus on increasing state revenue and making sure that state revenue that are derived from tax are done correctly without any leakage. Jokowi is expected to cut subsidy expenses in 2015 as well. These two actions are supposed to give Jokowi’s cabinet an extra fiscal space. Bond players are now waiting Jokowi to reveal the ministers that are going to serve during his presidency and would like to see whether he is going to keep his word for picking a professional minister.

Another sukuk auction with indicative target issuance of Rp1.5 tn will be held this Tuesday. DMO will conduct another weekly auction this week with three series to be auctioned this week are SPN-S13022015 (Coupon: discounted; Maturity: 13 Feb 2015), PBS005 (Coupon: 6.750%; Maturity: 15 Apr 2043) and PBS006 (Coupon: 8.250%; Maturity: 15 Sep 2020). We do believe that the auction will be oversubscribe by 1.7x – 2.2x from its indicative target issuance while our view on the indicative yield are as follows SPN-S13022015 (range: 5.900% – 6.100%), PBS005 (range: 9.140% – 9.340%) and PBS006 (range: 8.090% – 8.200%). Till last week, Indonesian government has raised approx. Rp42.52 tn worth of debt through bond auction in 3Q 14  which represents 59.92% of the 3Q 2014 target   of   Rp96 tn. On total, Indonesian government has raised approx. Rp310.12 tn worth of debt through domestic and global issuance which represent 75.57% of this year target of Rp430.2 tn.

SBR001 coupon rate adjusted to 9.00%. As we mentioned in our daily report (May 15, 2014), that SBR001 investor would favor the increase in coupon rate as Indonesia Deposit Insurance Corporation (LPS) raises their base deposit rate by 25bps to 7.75% for commercial banks and 25bps to 10.25% for rural banks (BPR) in the month of May. As a result, DMO adjusted the coupon rate for SBR001 to 9.00% for coupon payment on 20 Sep, 20 Oct and 20 Nov. Retail investor also have another opportunity to purchase Indonesia government bond as DMO plans to issue ORI011 (Indonesia retail bond 11^th series) between October/November this year. 

August’s Inflation might come in between 3.80% - 4.00% yoy while July trade balance would be surplus of US$50 mn – US$100 mn. Our economist sees that August inflation would continue creeping down to 3.80% - 4.00% yoy as last year subsidize fuel price hike impact towards inflation would totally fade and as the impact of volatile food price hike vanishes post Ramadan and Eid al Fitri festive. July trade balance is expected to come in surplus between US$50 mn to US$100 mn as imports growth may be significantly lower compared to exports growth with a consideration of Eid al Fitri preparation have completed before the festival and Eid al Fitri holiday may have inhibit port activity.

Further this week, we see that bond market would be recording gain this week amid moving within a tight range. Expectation of lower inflation rate and a surplus trade balance would give positive catalyst for bond market. These data however are scheduled to be published next week. 10-yr bond yield in our view would be moving within a range of 8.150% - 8.250%. Amid our positive call, minimum economy data release this week is the reasons why we see LCY bond prices won’t move higher aggressively.

BOND MARKET REVIEW

Indonesia Bond market recorded losses last week. As expected in our last weekly report, Indonesia LCY bond market booked losses amid constitutional court accepts KPU result for winning Jokowi and JK in the presidential race. There wasn’t any domestic positive sentiment which could drive bond price higher. Globally, despite geopolitical concern remains, its effect towards the bond market seems to reduce while FOMC minutes release which was slightly hawkish continued by Fed Yellen statement at Jackson Hole Symposium where she was rather taking the middle ground had also contributed to bond prices movement last week. Foreigner remains purchasing Indonesia bond between 14 – 18 Aug  as  foreigner  bought Rp3,630 bn worth of government bond from the secondary market. Amid foreign inflow, bond price fails to move higher indicating foreigners aren’t being aggressive by bidding higher price. Foreign ownership stood at Rp424.12 tn or 36.70% of total outstanding Indonesia LCY government tradable bond. Overall, bond market moved mixed within the region. Indonesia bond market recorded loss of 0.49 points (0.07%) last  week  while  India  bond  market booked the biggest gain with bond market inclining by 1.52 point (0.48%) followed by Philippines bond market (0.23%), Singapore (0.03%), Malaysia (0.02%) while on the other hand South Korea (-0.69%), Thailand (-0.35%), China (0.18%) and Taiwan bond market (-0.01%) booked losses.

Yield curve bear steepening on IDR segment and bull flattened on USD segment. On the IDR segment, FR0067 (30-yr) yield shifted upwards the most to 9.185% (+5.9bps) as price reached 95.595 from 96.179 on previous week. Yield spread between 10-yr benchmark series and 2-yr notes slightly narrowed to 59.68bps compared to 62.12bps on Aug 8^th (average YTD yield spread of 78.97bps). On the USD segment, yield curve bull flattened with RI0035 (20-yr) yield shifted downward the most as yield moved lower by 11.7 bps to 5.444% as price increased to 138.079 from 136.271 on previous week. Yield spread between 10-yr and 2-yr USD Indonesia sovereign notes narrows to 210.68bps (vs average YTD yield spread of 314.45bps) compared to 217.69bps on Aug 15^th as the 10-yr Indonesia USD bond yield continue decline from 4.222% to 4.120%.

Government and corporate trading volume remains thin. Total trading volume at secondary market for the government segment was noted amounting Rp44.92 tn with average trading volume per day of Rp8.98 tn (vs average per day (Jan – Jul) trading volume of Rp11.10 tn) during last week and was relatively illiquid with 439x transaction frequency on average (vs average transaction frequency per day (Jan – Jul) of 606x). However, trading volume was much heavier than previous week. FR0068 (20-yr benchmark series) and FR0070 (10-yr benchmark series) remains as the most actively traded with total volume reported amounting Rp14.80 tn and Rp12.46 tn respectively. FR0068 closed at 94.803 yielding 8.941% while FR0070 closed at 100.682 yielding 8.269%. Government bond with tenor 5 - 10 years and 15 – 20 years dominated Government bond trading last week.

On the credit segment, total trading volume was seen thin amounting Rp2,499 bn during last week resulting in average trading volume per day of Rp499.8 bn (vs average per day (Jan – Jul) trading volume of Rp684 bn) and was relatively liquid with 76x transaction frequency on average (vs average transaction frequency per day (Jan – Jun) of 89x). TUFI01ACN2 (Shelf Registration I Mandiri Tunas Finance Phase II Year 2014; A serial bond; Maturity date: 23 May 2017; Rating: _idAA) was the most actively traded bond with total volume reported amounting Rp532 bn. Corporate bond with AA and AA- rating dominate the credit segment last week.