Maybank Weekly Bond Report - 30 May 16

Positive in the Long Run, Cautious in the Short Run

BOND MARKET REVIEW

Indonesia bond market closed with a weekly gain supported by buying appetite. The increasing appetite in our view may have occurred as IGS yield seem to be attractive to certain bond investors. Yet, the incline of IGS prices was not supported by a huge volume and any economy data release as there weren’t any economic data release globally as well as domestically which could significantly move the IGS higher last week. In short, IGS prices incline in the mid of a silent market. During the week, Indonesia president met with Saudi Arabian prince as well as attended G7 meeting in Japan where he met with several delegates and Japan officials. He encourages FDI from both of the country to Indonesia. The result seems to be positive as these officials and delegates have the same intention with the Indonesian President. Bi-weekly conventional auction was conducted by DMO last week which received Rp14.7 tn while DMO awarded Rp10.0 bids.

Total trading volume at secondary market for the government segment was noted thin amounting Rp53.92 tn during last week with FR0056 (10y benchmark series) as the most actively traded. On the corporate segment, total trading volume was noted moderate amounting Rp4.18 tn with STTP01ACN2 (Shelf registration I Siantar Top Phase II Year 2016; A serial bond; Maturity date: 21 May 2017; Rating: _idA) as the most actively traded bond.

Foreign ownership stood at Rp616.4 tn or 37.9% of total tradable government bond as of May 26^th. Considering a 2 day’s settlement, Foreigner booked net sell worth of Rp9.19 tn within the month of May while biggest buyer during the same period was banking sector which bought Rp11.36 tn. Insurance companies was seen purchasing Rp9.41 tn due to liaising with new OJK regulation that Insurance companies should have IGS proportion approx. equal or above 20% of total investment asset.

We believe that bond market this week would be moving sideways with IGS prices to slightly decline. Bond investor in our view would be really cautious ahead of the U.S. May NFP and Unemployment data release mostly after Fed Yellen remarked that she sees the Fed to gradually and cautiously increase their overnight interest rate over time and probably in the coming months. In the short run, we do see that an increase of the FFR would impact negatively to the IGS and Indon prices. However, the negative sentiment could be offset if S&P rating agency upgrades Indonesia rating to investment grade and tax amnesty bill is passed by legislative. In the long run, we remain to believe the potential appreciation of both of the asset prices backed by expansionary monetary and fiscal policy stance taken by the local Central Bank and government respectively which would lead to higher GDP growth, lower unemployment rate and a stable inflation rate in the long run. ECB meeting will be held this week as well with consensus expecting of an unchanged of their refinancing rate. Indonesia May inflation rate will be published by Indonesia statistics this week, our house calls a monthly inflation of 0.18% MoM however yearly inflation would decline to 3.28% YoY. Expectation of a disinflation would result in IGS yield to decline. This is why we are expecting for IGS prices to move sideways this week.