BII Weekly Bond Report - 26 Jun 15

Temporary Price hike; Cautious of June Inflation Numbers

BOND MARKET REVIEW

Indonesia bond market booked a significant surge in prices supported by several data publication last week. Domestically, surplus of May trade balance (amid negative growth) along with maintained Bank Indonesia reference rate at 7.50% have been one of the reason for supporting the hike of LCY bond price. However, the main trigger (in line with our expectation) and game changer of LCY bond price to move higher was the dovish statement post FOMC meeting. FOMC meeting also decided to halt FFR at 0.25% while revising down 2015 U.S. GDP growth projection to 1.8% - 2.0% (compared to March projection of 2.3% - 2.7%). However, 15 member favors for raising FFR for the first time in 2015 while 2 member favors 2016 for the first time raise which indicates that the yoyo movement of LCY bond prices due to FFR hike/maintained expectation (either hawkish/dovish statement or raise in FFR) may continue in near future. Overall, market across the region moved positive last week with Indonesia bond market leading the incline by 1.44% followed by Singapore (+1.07%), India (+0.84%), Philippines (+0.55%), China (+0.37%), Malaysia (+0.35%), Thailand (+0.34%), Taiwan (+0.11%) and South Korea (+0.08%).

Foreign ownership stood at Rp521.1 tn or 38.93% of total tradable government bond as of Jun 19^th. Considering a 2 days settlement, Foreigner booked net buy worth of Rp4.64 tn MTD. On the other hand, Banks booked net sell Rp3.35 tn from their portfolio during the same period mostly due to maturity of FR0027 on June 15^th.

Total trading volume at secondary market for the government segment was noted amounting Rp63.10 tn with average trading volume per day of Rp12.62 tn (vs average per day (Jan – Apr) trading volume of Rp14.72 tn) during last week with FR0071 (15y benchmark series) as the most actively traded with total volume reported amounting Rp11.76 tn. On the corporate segment, total trading volume was noted moderate amounting Rp4.12 tn resulting in average trading volume per day of Rp0.82 tn (vs average per day (Jan – Apr) trading volume of Rp0.82 tn) with ISAT01ACN2 (Shelf registration I Indosat phase II Year 2015; A serial bond; Maturity date: 14 Jun 2016; Rating: _idAAA) as the most actively traded bond with total volume reported amounting Rp366 bn.

DOMESTIC MARKET UPDATE

DMO conducted debt switch auction last week. DMO received Rp5.43 tn during debt switch auction last week for the three destination bonds offered namely FR0053, FR0071 and FR0068. Prior to the debt switch auction, DMO sets nine source bonds to participate in the debt switch auction. However, DMO only awarded Rp2.95 tn making its Bid to Cover ratio at 1.84x.

23^rd Jun Conventional Auction received a massive demand. Indonesian government conducted their conventional this week and received incoming bids of Rp40.01 tn bids versus its target issuance of Rp12.00 tn or oversubscribed by 3.3x. However, DMO only awarded Rp18.00 tn bids for its 8mo SPN which was sold at a weighted average yield (WAY) of 6.69921%, 6y FR0053 at 8.24853%, 11y FR0056 at 8.36990%, 15y FR0071 at 8.42989% while 20y FR0068 was sold at 8.53585. Incoming bids were mostly clustered on the FR0056 (11y). No bids were rejected during the auction. Bid-to-cover ratio during the auction came in at 1.11X – 4.20X. Foreign incoming bids during the auction were noted Rp13.69 tn or 34.2% of total incoming bids. However, only Rp6.33 tn bid (35.2% of total awarded bids) were awarded to foreign investors. Heavy demand in our view occurred as DMO offered FR0053 and FR0056 series during today’s auction. FR0053 and FR0056 series is expected to be the upcoming 5y and 10y benchmark series in 2016. As a result, investors started to collect these series to add to their portfolio. Till the date of this report, Indonesian government has raised approx. Rp79.02 tn worth of debt through bond auction which represents 94.6% of the 2Q 15 target of Rp83.50 tn. On total, Indonesian government has raised approx. Rp285.6 tn worth of debt through domestic and global issuance which represent 63.2% of this year target of Rp451.8 tn.

This week, Indonesia bond market has started with a positive record. Positive sentiment came mainly from the massive demand during bond auction and continuation of post FOMC dovish statement. Going forward, 1Q 15 U.S. GDP data publication along with settlement of Greece issue would determine either positive/negative sentiment in Indonesia bond market till the end of this week. However, the main event this week highly depends on 1Q 15 U.S. GDP data. A potential surging of LCY bond prices remains on the note of higher June inflation expectation cause by Ramadhan festivity and El Nino effects. We see the 10y yield to move within the range of 8.100% - 8.500% this week.