BII Weekly Bond Report - 11 Aug 15

Sideways Movement

BOND MARKET REVIEW

Indonesia bond market closed with a slight gain last week amid slowing down of 2Q 15 GDP growths and stabled July CPI. LCY bond prices hike was supported by buying appetite of both onshore and offshore investors especially post Tuesday auction where the incoming bids was recorded quite decent. Big chunk of the bids during the auction came from onshore bidders rather than offshore bidders. Investors were seen accumulating the upcoming expected benchmark series and is predicted to continue their accumulation. Buying appetite in our view might have occurred as supply of Indonesia sovereign bond through auction start to scars. However, this does not guarantee an incline in LCY bond prices as investor might be cautious of upcoming expected FFR hike. Presence of Indonesia central bank was also noted during the first day of the week. Profit taking was recorded on Thursday while a rather quiet market on Friday occurs due to the absence of Singapore market. Overall, market across the region moved positive aside from Malaysia and China bond market which booked losses last week with a decline of 0.35% and 0.11% respectively. Philippines bond market book the highest gain by an incline of +0.69% followed by Taiwan (+0.44%), Singapore (+0.23%), Thailand (+0.22%), India (+0.16%), Indonesia (+0.12%) and south Korea (+0.10%).

Foreign ownership stood at Rp533.4 tn or 38.94% of total tradable government bond as of Aug 4^th. Considering a 2 day’s settlement, Foreigner booked net sell worth of Rp2.28 tn in the month of July. Within the same period, Banks purchased Rp11.66 tn while mutual funds booked net buy worth of Rp2.05 tn.

Total trading volume at secondary market for the government segment was noted amounting Rp74.09 tn with average trading volume per day of Rp14.82 tn (vs average per day (Jan – Jun) trading volume of Rp15.22 tn) during last week with FR0053 (6y) as the most actively traded with total volume reported amounting Rp17.47 tn. On the corporate segment, total trading volume was noted thin amounting Rp1.79 tn resulting in average trading volume per day of Rp0.36 tn (vs average per day (Jan – Apr) trading volume of Rp0.81 tn) with APLN01CN3 (Shelf registration I Agung Podomoro Land Phase III Year 2014; Maturity date: 8 Oct 2018; Rating: _idA) as the most actively traded bond with total volume reported amounting Rp150 bn.

DOMESTIC MARKET UPDATE

2Q 15 GDP grew slower at 4.67% YoY; July inflation stabled at 7.26% YoY. Several economic data was published by Indonesia statistics last week such as 2Q 15 GDP which grew slower at 4.67% YoY while July inflation stabled at 7.26% (Read our Economist GDP and CPI snapshot reports for more detail). From the discussion with Indonesia economist, we learned that our house call for 3Q GDP and 4Q 15 are 4.96% and 5.16% respectively while inflationary may ease to 7.18% YoY and 4.12% in Q3 and Q4 respectively. This means that we are expecting Indonesia’s fundamental to be better ahead till year end. While expectation might be positive for LCY bond market hence we see that bond market would move sideways with a negative tendency in 3Q 15 and slight bullish in 4Q 15. Our consideration are based on that investor would be cautious on expected FFR hike (our expectation: end 3Q 15) and when the FFR hike comes in, we see the shock from this event may bring the yield of 10y benchmark series to as high as approx. 9.00%. At this point, investors might collect Indonesia’s bonds as its yield may be very attractive.

DMO issued Rp15 tn through auction last week. Indonesian government conducted their conventional auctions last week and received incoming bids of Rp28.06 tn bids versus its target issuance of Rp10.00 tn or oversubscribed by 2.8x. However, DMO only awarded Rp15.00 tn bids for its 3mo, 1y, 6y and 16y bonds. Incoming bids were mostly clustered on the FR0053 series. 3mo SPN was sold at a weighted average yield (WAY) of 6.22650%, 1y SPN at 6.94313%, 6y FR0053 at 8.33505% while 16y FR0073 was sold at 8.84979%. No bids were rejected during the auction. Bid-to-cover ratio during the auction came in at 1.50X – 2.65X. Foreign incoming bids during the auction were noted Rp8.60 tn or 30.7% of total incoming bids. However, only Rp5.14 tn bid (34.3% of total awarded bids) were awarded to foreign investors.

DMO issued Samurai bond worth of ¥100 bn. After postponing samurai bond issuance in the first semester of this year, DJPPR finally issued three series of samurai bond last week namely RIJPY0818 (3y), RIJPY0820 (5y) and RIJPY0825 (10y). DMO normally issues samurai bond with Japan Bank for International Cooperation (JBIC) as their guarantor. However, the issuance of Indonesia samurai bond this time was quite different compared to last several samurai bond issuance as the 3y and 5y samurai bond was issued with clean basis term while the 10y bond was issued with JBIC as the guarantor. We consider the issuance of samurai bond as a success. This issuance also marks DMO achievement of 25% of global bond issuance target from the 2015 total gross issuance target of Rp452 tn.

Weekly auction with an indicative target issuance of Rp2.5 tn. DMO will conduct their sukuk auction this week with five series to be auctioned which are SPN-S05022016 (Coupon: discounted; Maturity: 5 Feb 2016), PBS006 (Coupon: 8.250%; Maturity: 15 Sep 2020), PBS007 (Coupon: 9.000%; Maturity: 15 Sep 2040), PBS008 (Coupon: 7.000%; Maturity: 15 Jun 2016) and PBS009 (Coupon: 7.750%; Maturity: 25 Jan 2018). We believe that the auction will be oversubscribe by 2.5x – 3.5x from its indicative target issuance while our view on the indicative yield are as follows SPN-S05022016 (range: 6.730% – 6.830%), PBS006 (range: 8.450% – 8.550%), PBS007 (range: 8.700% – 8.800%), PBS008 (range: 7.700% – 7.800%) and PBS009 (range: 8.130% – 8.230%). Till last week, Indonesian government has raised approx. Rp32.9 tn worth of debt through bond auction in 3Q 15 which represents 52.3% of the 3Q 2015 target of Rp63.0 tn. On total, Indonesia government has raised approx. Rp359.7 tn worth of debt through domestic and global issuance which represent 79.6% of this year target of Rp452.2 tn.

This week, we see that bond prices would move sideways and within a tight range as there won’t be any major economy data publication globally and domestically. We see potential upside of 16y and 20y benchmark series prices while FR0056 price has the potential to move lower in near future. Buying appetite would occur at various days as Indonesia bond supply starts to scars with issuance target reaching approx. 84% of total 2015 issuance target (incl. upcoming ORI012 issuance with an expectation issuance size of Rp20 tn).  However, a slump in bond prices specifically front end tenor’s series is expected to occur should Fed start its normalization of monetary policy (our house view: end 3Q 2015). We expect 10y yield to move within the range of 8.200% - 8.700% this week.