BII Weekly Bond Report - 13 Jan 15

Week of Issuances

BOND MARKET REVIEW

Indonesia bond market posted gains on the beginning of the week in 2015. Positive news such as certainty of government spending allocation to infrastructure spending, moody’s positive comments on Indonesia sovereign credits, Indonesia government passing its 2015 revised budget to legislative which is seen to be optimist on the note of further narrowing fiscal deficit, higher December official reserves assets, upcoming fuel price adjustment due to slump in world oil prices along with foreign inflows and successful bond issuance (domestic and global bond) has made prices to surge during last week. Investor which failed to acquire was seen buying IGS even with a higher price. Most of the bond market across Asia booked gain with Singapore bond market leading as it booked the largest profit with an incline of +1.26% followed by Thailand (+1.22%), South Korea (+0.62%), Indonesia (+0.21%), Philippines (+0.18%), Taiwan (+0.18%), India (+0.16%) and China (+0.13%). Malaysia bond market is the only one which booked losses by 0.20%

In month of December, Foreigners sold Rp19.84 tn from their portfolio on the fear of higher inflation rate. However, these has change as foreigner added Rp1.60 tn to their portfolio till 9 Jan. Foreign ownership now stood at Rp462.95 tn or 38.01% of total outstanding government bond as. YTD, banks booked the largest purchase as this industry bought Rp22.96 tn while central banks sold Rp20.66 tn. It’s viable to say that foreigners might have purchased most of ORI011 after the holding period.

Total trading volume at secondary market for the government segment was noted amounting Rp52.54 tn with average trading volume per day of Rp10.521 tn (vs average per day (Jan – Nov) trading volume of Rp11.56 tn) during last week with FR0068 (20-yr benchmark series) as the most actively traded with total volume reported amounting Rp12.43 tn. On the corporate segment, total trading volume was noted heavy amounting Rp3.85 tn resulting in average trading volume per day of Rp0.77 tn (vs average per day (Jan – Nov) trading volume of Rp0.66 tn) with BMRI01 (Bank Mandiri subordinated bond I Year 2009; B serial bond; Maturity date: 11 Dec 2016; Rating: _idAA+) as the most actively traded bond with total volume reported amounting Rp432 bn.

DOMESTIC MARKET UPDATE

DMO issued Rp15 tn IGS in the beginning of January. In the beginning of 2015, DMO have at least issued Rp15 tn worth of IGS through two different issuance method. They began with new issuance of FR0053 and FR0061 on January 2^nd and manage to absorb Rp3 tn while Rp12 tn worth of IGS was issued through bond auction. During the first auction, we were expecting incoming bids to be at least similar or higher compared to incoming bids during first auction in 2014 which received Rp29 tn. However, we weren’t totally satisfied with the first weekly auction as it indicates a sluggish demand of IGS amid it was oversubscribed. We hope that incoming bids during next conventional auction could be far better from last week auction. Somewhere around this month, we see that DMO would issue its Yankee Bond as they normally issue this asset in the month of January.

Successful issuance of Yankee Bond worth of US$4 bn. Aside from domestic IGS issuance, last week DMO also issued Global Medium Term Notes (GMTN) worth of US$4 bn. In our view, this issuance could be considered as a success as DMO could squeeze their weighted average yield (WAY) slightly near the traded yield. Incoming bids during the book building came in approx. USD19.3 bn higher compared to last year incoming bids of USD17.5 bn or oversubscribed by 4.8x. American investor (asset managers) remains as the biggest investors as they purchased 48% of RI0125% and 53% of RI0145. In term of timing, we see DMO issued this GMTN at the right time as UST 10-y is currently running at 1.945% while Indon CDS 10y at 248.7 bps. Issuance of global bond would also result in a higher January official reserve assets.

First sukuk auction in 2015 with an indicative target issuance of Rp1.5 tn. DMO will conduct their first sukuk weekly auction this week with four series to be auctioned which are SPN-S14072015 (Coupon: discounted; Maturity: 14 Jul 2015), PBS006 (Coupon: 8.250%; Maturity: 15 Sep 2020), PBS007 (Coupon: 9.000%; Maturity: 15 Sep 2040) and PBS008 (Maturity: 15 Jun 2016). We believe that the auction will be oversubscribe by 2x – 3x from its indicative target issuance while our view on the indicative yield are as follows SPN-S14072015 (range: 6.65% – 6.75%), PBS006 (range: 7.99% – 8.10%), PBS007 (range: 8.91% – 9.01%) and PBS008 (range: 7.10% – 7.20%). Till last week, Indonesian government has raised approx. Rp12.0 tn worth of debt through bond auction in 1Q 15 which represents 15.3% of the 1Q 2015 target of Rp78.5 tn. On total, Indonesia government has raised approx. Rp65.6 tn worth of debt through domestic and global issuance which represent 15.2% of this year target of Rp431.0 tn.

This week, we see that bond market would continue recording gain yet with a note of slower prices escalation. Last week positive sentiments such as IGS and Indon successful issuance, fuel subsidy reformation, 2015 revised budget proposal to legislative by government and expected future rating hike would contribute to this week price escalation. Central bank RDG meeting along with 4Q Indonesia GDP growth publication during the final days of this week would create the volatility of bond prices. Continuation of foreign inflows would definitely support the gains in bond market. We see that this week, bond prices would move within the range of 7.60% - 7.90%.