CIMB IDR Weekly Fixed Income Market Commentary ended 03 Oct 2014

Attached is our weekly commentary dated 03 October 2014

 
·         Government bonds yields were significantly higher, especially for 1-year that increased by 40 bps, while medium to long term yields were higher by 20 – 25 bps following the political turbulence that emerged between pro Joko Widodo administration and opposition parties. Anticipation of higher interest rate in the US and possibility of domestic energy price hike kept yields elevated. Trading volume in the government bond market increased twofold despite of the sell-offs, with daily volume fell to average IDR13.67 trillion per day from IDR 7.56 trillion recorded in the previous week.
·         The government conducted regular bond auction but raised only IDR7.75 trillion, lower than the indicative target IDR 10 trillion. Incoming bids totaled IDR19.87 trillion and were equally divided between T-bills and fixed rate bonds. Government also issued IDR1 trillion Project Based Sukuk for private placement.  We noted that currently, in total, the government has issued around IDR375 trillion or approximately 87% of its total target. OJK (Financial Services Agency) issued a new regulation that caps commercial banks’ maximum deposit rate to prevent price war between banks that could further increase domestic interest rate. The policy could improve domestic bond market and brings down yields.
·         This week, we see that the market movement will depend on two events. The first is regular Islamic bonds auction that will be conducted on 7 October September. We think that the auction will attract demand around IDR4 trillion. Yields could be lower due to stabilizing Rupiah and liquidity flush. We view the government could absorb only IDR1 trillion, lower than indicative target of IDR1.5 trillion.
·         On the other hand, players are waiting for FOMC minutes of meeting this week. Investors are eager to find out the next big move from The Fed that will determine direction of global bond yields.
·         The credit market was thin and yield was moving in line with government bond market. Volume decreased sharply last week with daily average volume of IDR271 billion versus IDR642 billion in the previous week. The heaviest traded corporate bond is Medco Energi International (maturing in June 2017; idAA-) amounting total IDR91 billion. We noted that most of the trades transacted along AAA, AA+ and AA- rated segments. Below 3-year maturity bonds controlled 70% of total volume.