Maybank Weekly Bond Report - 18 Apr 16

Remain Positive on IGS Market 

BOND MARKET REVIEW

In line with our expectation, Indonesia bond market did close higher with IGS prices rallying with belly to long end tenor IGS prices moving upwards the most. However, the 2y IGS yield shifted down the most as its price was relatively undervalued. Central bank decision to change their reference rate reference from current 6.75% (1y policy rate) to 5.5% (1w policy rate – effectively Aug 19^th) have also supported the downward move of 2y IGS yield the most last week. The rumor of such plan was actually quite strong during the week which may have made several investors to decide for a risk on decision. Global and domestic fundamental data which was published last week seem to be favorable for IGS market. Both U.S. yearly CPI and retail sales came in slightly below expectation. China 1Q16 GDP which grew 6.7% YoY or slightly lower compared to 1Q15 GDP growth of 6.8% was in line with consensus expectation and miss to create any significant negative response to the IGS market. Indonesia trade balance came in as a surplus of US$497 mn which is slightly higher compared to the consensus expectation. The bond auction which we predicted could hinder the IGS price hike seem to have boost buying appetite in the secondary market last week as the incoming bids was the second largest YTD. What was unexpected is MAS surprised move to a neutral policy by not allowing the country’s currency to appreciate have impacted which made IDR to Jump above the Rp13,300 level for some while.

Total trading volume at secondary market for the government segment was noted heavy amounting Rp85.61 tn during last week with SR008 (3y) as the most actively traded. On the corporate segment, total trading volume was noted moderate amounting Rp2.36 tn with IMFI02ACN3 (Shelf Registration II Indomobil Finance Phase III Year 2016; A serial bond; Maturity date: 26 Mar 2017; Rating: _idA) as the most actively traded bond.

Foreign ownership stood at Rp619.6 tn or 38.9% of total tradable government bond as of Apr 14^th. Considering a 2 day’s settlement, Foreigner booked net buy worth of Rp9.36 tn within the month of April while biggest buyer during the same period was banking sector which bought Rp13.63 tn. However, the biggest seller was individuals which bought SR008 during primary issuance and might have taken profit post minimum holding period.

In our view, Indonesia bond market remain to be attractive supported by expectation of rating upgrade by S&P rating, low inflationary pressure till year end, passing tax amnesty bill by legislative, higher GDP growth, inflows of funds from insurance companies and pension funds to bond market, shifting of banking third party fund to bond market if OJK decides to use BI 1w policy rate + spread to replace current BI 1y policy rate + spread for ceiling deposit rate of bank buku 3 and 4. Currently, Indonesia is not highly leveraged as its debt to GDP ratio remains below 30% while it’s not top heavy also which means during crisis, the country could easily borrow loans. Last but not least is the expectation of DMO to add loan instead of issuing more IGS/Global bond to finance additional budget deficit as a result of several key economy indicator revision. Despite we believe that the 10y yield could reach 7% level but we remain to call buy on the 15y IGS with an expectation yield to reach 7.3% - 7.4%. We believe that this week, IGS prices may move sideways with a potential of slight correction backed by lack of data release globally and domestically. Volatility of IGS would be depending on inflows/outflows as well as statements by domestic or global officials. Chances for the Indon yield to move lower remains open as a result we reiterate our call buy for the 30y tenor Indon with an expectation of the yield to move lower to 4.8% if it breaks the support yield level of 5.10%.