CIMB IDR Weekly Fixed Income Market Commentary ended 4 September 2015

• Indonesian government bond yield curve steepened for the week ended 4 September, with yields increased by about 5bps on the front end of the curve, and increased by 5-15bps on the belly of the curve. USD/IDR reached the highest level since 1998 financial crisis (14,178) and 10-year government bond yield touched 8.93%. Weak sentiment persisted, driven by the anticipation of interest rate increase in the US and weak China economic outlook. Meantime, daily average trading volume fell to IDR 10.8 trillion.
• US unemployment rate in August fell to 5.1%, the lowest since April 2008. US labor market is widely considered at full employment. Lower future unemployment rate in the US could be inflationary and might trigger rate increase (s) by the Fed. On the other hand, China PMI manufacturing index in August was at the lowest in three years and hit global financial market confidence.
• The government conducted a regular IDR bond auction last week and absorbed IDR10 trillion. Incoming bids were considered weak amounting IDR16.38 trillion only. The government has issued a total of IDR386.98 trillion year-to-date, versus the annual gross target of IDR452.19 trillion. On top of that, the government will conduct a regular IDR Islamic bond auction with indicative target of IDR2.5 trillion on 8 September.
• Attractive yield offering as well as anticipation of lower inflation by year end will support domestic bond market, in our view. Stronger current account is also positive to the bond market. On the flip side weak Rupiah is the main threat for domestic bond market. Hence, we view that the bond market may strengthen this week especially on the belly and tail of the curve.
• Yield spreads mostly narrowed in corporate bond market, especially the “AAA” and “AA” rated papers. Most actively traded bond by volume was still Eximbank May’16 (AAA) while most active bond by frequency of trade was Subordinated Bank Bukopin Mar’19 (A). Market share of “A” and “AA” rated papers improved while share of “AAA” rated fell compared to previous week. Market activity fell compared to previous week but was still relatively big where daily average volume amounting IDR848 billion.