BII weekly Bond Report - 1 Jul 15

Sideways

BOND MARKET REVIEW

Indonesia bond market during last week booked the highest gain supported by a massive demand during bond auction. The massive demand occurred not due to fundamental reasons yet was a result of introduction of FR0053 (6y) and FR0056 (11y) which is expected to be the next benchmark series. Investors which failed to gain during the auction have aggressively purchase it through the secondary market. During last several days of the week, correction on bond prices occurred on the note of profit taking and as a result of recovery in U.S. economy data as well as uncertainty of Greece staying in Eurozone. Recovery in U.S. economy data was showed through better U.S. New Home Sales and Personal Spending in May. Overall, market across the region moved mixed. Indonesia bond market booked the highest gain last week with an incline of 1.79% followed by Taiwan (+0.20%), Philippines (+0.06%) and Malaysia (+0.02%). On the other hand, Singapore (-1.09%), India (-0.44%), South Korea (-0.22%), China (-0.07%) and Thailand (-0.02%) booked losses.

Foreign ownership stood at Rp538.9 tn or 39.73% of total tradable government bond as of Jun 26^th. Considering a 2 days settlement, Foreigner booked net buy worth of Rp22.42 tn MTD. On the other hand, Banks booked net sell Rp4.97 tn from their portfolio during the same period mostly due to maturity of FR0027 on June 15^th. However, banks were seen purchasing during the bond auction last week.

Total trading volume at secondary market for the government segment was noted amounting Rp122.10 tn with average trading volume per day of Rp24.52 tn (vs average per day (Jan – Apr) trading volume of Rp14.72 tn) during last week with FR0053 (6y benchmark series) as the most actively traded with total volume reported amounting Rp22.92 tn. On the corporate segment, total trading volume was noted moderate amounting Rp3.36 tn resulting in average trading volume per day of Rp0.67 tn (vs average per day (Jan – Apr) trading volume of Rp0.82 tn) with TAFS01ACN2 (Shelf registration I Toyota Astra Financial Services phase II Year 2015; A serial bond; Maturity date: 21 Jun 2016; Rating: AAA_(idn)) as the most actively traded bond with total volume reported amounting Rp498 bn.

DOMESTIC MARKET UPDATE

June inflation came in at 7.26% YoY. June inflation came in at 0.54% Mom or 7.26% lower compared to consensus expectation of 7.40% YoY. The creeping up inflationary pressure occurred due to higher consumer goods (such as food prices) ahead of Ramadhan festivity and El Nino. June core inflation on the other hand came in stable at 5.04%. We computed yield ratio between each 5/10/15/20 generic series against core inflation and found that the potential for 15y and 20y series price is higher compared to the 5y series with an expectation that core inflation would reach 4.31% YoY at the end of this year. In line with our 3^rd March weekly issuance, the yield ratio of every series started to reach its average.

DMO conducted several issuances this week. Indonesian government conducted several issuances during the first several days of the week. On Monday, Indonesia government conducted USDFR0001 auction and received incoming bids worth of US$871.7 mn or oversubscribed by 1.7x of its target issuance. The incoming bids were even higher compared from the first issuance of USDFR0001 which only received US$559.4 mn of incoming bids. However, DMO only awarded US$500 mn bids (equivalent to Rp6.65 tn). The awarded WAY for this series was at 1.90138%. DMO issued SDHI 2020 D through private placement of hajj funds worth of Rp1 tn on Tuesday. SDHI 2020 D pays an 8.20% fixed coupon with a tenor of 5y. SDHI 2020 D is a non tradable series. As the same time with the SDHI 2020 D issuance, DMO conducted their sukuk auctions and received incoming bids of Rp3.87 tn bids versus its target issuance of Rp2.00 tn or oversubscribed by 1.9x. However, DMO only awarded Rp2.17 tn bids for its 6mo SPN-S which was sold at a weighted average yield (WAY) of 6.77919%, 1y PBS008 at 7.77997% while 5y PBS006 was sold at 8.52246%. Incoming bids were mostly clustered on the front end tenors. PBS007 bid was rejected during the auction. Bid-to-cover ratio during the auction came in at 1.29X – 2.08X.

This week, Indonesia bond market has started by recording losses. However, the buying appetites by offshore buyers have made bond prices spiked higher on Tuesday trading and have continue to Wednesday trading due to better inflation number compared to expectation. This occurred amid China PBOC cuts their reference rate and Greece failing to pay IMF. We believe that further direction of bond prices movement would depend on U.S. economy data publication such as NFP and unemployment data. We see that bond market would move sideways with 10y yield to move within the range of 8.000% - 8.500% this week.