BII Weekly Bond Report - 4 Nov 14

Limited Positive Tendency

BOND MARKET REVIEW

As expected, Indonesia bond market moved mixed and recorded a slight profit last week. Several events which triggered bond prices volatility last week were failing positive sentiment from Jokowi cabinet inauguration, domestic political instability with Indonesia Hebat coalition to create a separate House leadership, Post FOMC meeting which was rather hawkish along with a better 3Q US GDP data at 3.50% (vs consensus: 3.00%), lower indicative target in upcoming conventional with rumors that DMO would increase global issuance portion for 2015 issuance have made investors purchasing Indonesia bonds which save bond prices to sunk even more deeper and finally an additional BOJ stimulus to ¥80 tn per year (previously ¥60-70 tn per year). Overall this week, most of the bond market across Asia recorded gain with India bond market recorded the largest gain as the market surged by +3.09% followed by Philippines (+1.70%), China (+0.78%), South Korea (+0.53%), Indonesia (+0.22%) and Malaysia (+0.07%). On the other hand Thailand (-0.46%), Singapore (-0.42%) and Taiwan (-0.01%) bond market booked losses last week.

Foreigners purchased Rp6.65 tn worth of Indonesia government bonds between Oct 23^rd – 30^th. Foreign ownership now stood at Rp459.94 tn or 37.81% of total outstanding government bond as of Oct 30^th. Within the same period of time, banks sold Rp12.65 tn while central banks bought Rp6.43 tn.

Total trading volume at secondary market for the government segment was noted amounting Rp47.42 tn with average trading volume per day of Rp9.48 tn (vs average per day (Jan – Sep) trading volume of Rp11.18 tn) during last week with FR0071 (15-yr benchmark series) as the most actively traded with total volume reported amounting Rp13.04 tn. Government bond with tenor 5-10 and 10-15 years dominated Government bond trading last week. On the credit segment, total trading volume was noted heavy amounting Rp3.74 tn resulting in average trading volume per day of Rp0.75 tn (vs average per day (Jan – Sep) trading volume of Rp0.64 tn) with BEXI02BCN3 (Shelf registration II Indonesia Eximbank Phase III Year 2014;; B serial bond; Maturity date: 16 Oct 2017; Rating: _idAAA) was the most actively traded bond with total volume reported amounting Rp630 bn. Corporate bond with AAA rating traded the most last week.

DOMESTIC MARKET UPDATE

October Inflation: 4.83%; October Core Inflation: 4.02%; September trade balance: -US$0.27 bn. Indonesia statistics issues several Indonesia fundamental data which seems to remain manageable. October 2014 inflation came in at 4.83% YoY or 0.47% MoM while core inflation came in at 4.02% YoY. Trade balance came in deficit of US$0.27 bn. These data were basically in line with our economist outlook. We computed Yield ratio of each benchmark series and found that all benchmark series yield ratio are currently at their +1StDev which also means that either bond yields could decline (bond price incline) or core inflation might incline. Despite fundamentally bond price are relatively cheap as they are below their fair value (based on yield ratio computation) yet it would take some time for this yield ratio to start nearing its average remembering subsidize fuel price hike plan in upcoming couple of weeks. Hence, we are still optimist that bond prices would increase at least several months after upcoming subsidize fuel price hike.

DMO to conducted weekly auction with indicative target issuance of Rp5 tn. DMO will conduct their weekly auction this week with three series to be auctioned which are SPN12150206 (Coupon: discounted; Maturity: 6 Feb 2015), SPN12151105 (Coupon: discounted; Maturity: 5 Nov 2015) and FR0070 (Coupon: 8.375%; Maturity: 15 Mar 2024). We believe that the auction will be oversubscribe by 2.5x – 4.0x from its indicative target issuance while our view on the indicative yield are as follows SPN12150206 (range: 6.100% – 6.300%), SPN12151105 (range: 6.950% – 7.100%) and FR0070 (range: 7.930% – 8.100%). On total, Indonesia government has raised approx. Rp398.4 tn worth of debt through domestic and global issuance which represents 97.88% of this year target of Rp430.2 tn.   Assuming that if Indonesia government issues Rp1.5 tn upcoming three sukuk auction in 4Q 2014 then the Government needs to issue Rp4.14 tn at next upcoming two conventional auction in 4Q 2014 to meet their target of Rp24.79 tn.

Further this week, we see that bond price would remain moving mixed with limited positive tendency. BOJ additional stimulus might also affect Indonesia bond market should the flows enters Indonesia bond market. October Inflation rate and September trade balance were basically in line with economist consensus. Investor would also wait and see on upcoming 3Q 14 Indonesia GDP where our economist estimates that 3Q 14 GDP would be at 5.08% YoY or 3.03% QoQ with consideration of a slower export rate due to sluggish global demand and lower commodity prices, slower private consumption due to completion of election as well as sluggish domestic purchasing power as a result of last year subsidize fuel price hike and slower investment as investor were waiting and seeing policies and plans made by new government and easing tension at Indonesia legislative. Going forward, our economist expects that FY 14 GDP would reach 5.16% with the support of government spending and increasing investment on the note of new hope of new government. Globally, upcoming publication of economy data such as US Nonfarm payroll, US unemployment rate and ECB rate decision would affect the volatility of LCY bond market. Overall, we see that LCY 10-yr bond yield would move within the range of 7.900% - 8.200% this week.