BII Weekly Bond Report - 9 Jun 15

Bearish; Potential Buying Time

BOND MARKET REVIEW

Indonesia bond market slumped significantly last week along with rising May inflationary pressure, aggressive foreign outflow and depreciating Rupiah currency. Going forward, inflation in the month of June is expected to rise on the note of fasting and Eid Al Fitr Festive as well as new academic calendar. Weakening of bond market was seen not only in Asia as Eurozone and U.S. bond market experiences the same declining conditions. Bond prices slump in Eurozone was mainly due to Grexit issue. We won’t be surprise of a negative real interest rate in near future with a higher domestic inflation expectation. The decline which happen last week have not reply to a better U.S. NFP data which came in at 280K or higher compared to economic consensus of 225K and a slight increase of U.S. unemployment rate in May to 5.50% (vs 5.40% in April). A negative response to this data has occurred earlier this week. Overall, market across the region moved negative last week with Indonesia bond market leading the decline by 2.17% followed by Singapore (-1.41%), Thailand (-0.82%), India (-0.75%), South Korea (-0.68%), Phillipines (-0.28%), Malaysia (-0.16%) and Taiwan (-0.14%). Only China bond market booked profit by 0.31%.

Foreign ownership stood at Rp516.3 tn or 38.51% of total tradable government bond as of Jun 5^th. Considering a 2 days settlement, Foreigner booked net sell worth of Rp0.13 tn between on the 1^st and 3^rd day of June. On the other hand, Banks were seen purchasing during the sukuk auction and added Rp1.23 tn to their portfolio. However, for the first two days of the month, banks booked net buy of Rp713 bn.

Total trading volume at secondary market for the government segment was noted amounting Rp35.37 tn with average trading volume per day of Rp8.84 tn (vs average per day (Jan – Apr) trading volume of Rp14.72 tn) during last week with FR0070 (10y benchmark series) as the most actively traded with total volume reported amounting Rp8.76 tn. On the corporate segment, total trading volume was noted thin amounting Rp1.89 tn resulting in average trading volume per day of Rp0.47 tn (vs average per day (Jan – Apr) trading volume of Rp0.82 tn) with TBLA02 (Tunas Baru Lampung II Year 2012; Maturity date: 28 Mar 2023; Rating: _idA) as the most actively traded bond with total volume reported amounting Rp150 bn.

DOMESTIC MARKET UPDATE

Creeping up May inflation; May Official reserve asset position slightly decline to US$110.8 bn. Indonesia statistics issues May inflation data which came in at 0.36% MoM or 7.15% YoY. Our Indonesia economist (please read: Economic and Market Research Snapshot: Spurred by the Increase in Prices of Foodstuffs and Electricity’s Tariffs) sees that increasing inflationary pressure in May occur due to rising foodstuffs, electricity tariff and gasoline. May core inflation was rather stabled at 5.04% YoY. We computed ratio spread between 10y yields against monthly core inflation and found that if our economist expects core inflation to reach 4.31% by the end of this year then at approx. 8.55% yield, 10y govvy seems to be at its fair market price. Accumulating this asset at yield between 8.75% - 9.30% seems to be decent with a chance of the yield to fall to 8.30%.

Bank Indonesia (BI) in a separate report published May official reserve asset position which slight decline to US$110.8 bn (vs April position of US$:110.9 bn). BI further explains that the decline occur due to  increasing foreign exchange demand for Government foreign debt payments and the use of foreign exchange to stabilize rupiah exchange rate in accordance with the fundamental. Meanwhile, the foreign exchange receipts came from Government global sukuk issuance worth of US$2 bn recently. This would also mean that excluding the receipt from global sukuk issuance, May official reserve asset would have been approx. US$108.8 bn.

Weekly auction with an indicative target issuance of Rp10 tn. DMO will conduct their conventional auction this week with four series to be auctioned which are SPN03150910 (Coupon: discounted; Maturity: 10 Sep 2015), SPN12160610 (Coupon: discounted; Maturity: 10 Jun 2016), FR0053 (Coupon: 8.250%; Maturity: 15 Jul 2021) and FR0071 (Coupon: 9.000%; Maturity: 15 Mar 2029). We believe that the auction will be oversubscribe by 1.2x – 2.2x from its indicative target issuance while our view on the indicative yield are as follows SPN03150910 (range: 5.950% – 6.050%), SPN12160610 (range: 7.900% – 8.000%), FR0053 (range: 8.550% – 8.650%) and FR0071 (range: 8.950% – 9.050%). Till last week, Indonesian government has raised approx. Rp43.3 tn worth of debt through bond auction in 2Q 15 which represents 51.9% of the 2Q 2015 target of Rp83.5 tn. On total, Indonesia government has raised approx. Rp249.9 tn worth of debt through domestic and global issuance which represent 55.3% of this year target of Rp451.8 tn.

This week has started with both Indonesia bond market and Rupiah currency weakening as a response to better U.S. NFP data. We are monitoring for any sign of reversal. Hence, we believe that bearish trend would continue as June (for the last 10 years) has always been unfavorable to Indonesia bond market. Investor might be cautious on the expectation of further declining May domestic local auto and motorcycle data, worsening performance of this week bond auction and U.S. May retail sales for this week trading. We see the 10y yield to move within the range of 8.500% - 8.900% this week.