Optimist on the IGS Market

BOND MARKET REVIEW

Indonesia bond market moved sideways and closed slightly lower at the end of last week trading session amid most of the data released globally and domestically was favorable to the IGS market. The escalading fear related to brexit could have avoided foreign inflows to IGS market. Globally, U.S. economic data came out mixed with May CPI came in at 1.0% YoY or grew by 0.2% MoM (lower compared to consensus), May retail sales grew by 0.5% MoM (higher compared to consensus). On the other hand, FOMC meeting decided to keep their reference rate unchanged at 0.5% while also lower the pace of future rate increase. Deflation remain to persist in Eurozone as May CPI was showing a -0.1% YoY figure. Indonesia trade balance surplus during the month of May was noted narrowing to $376 mn compared to Apr surplus of $662 mn. The narrowing was contributed by increase in imports of consumer goods ahead of Ramadan celebration. Indonesia central bank during the Board of Governor meeting decide to ease monetary policy by cutting its reference rate and BI 7-day (Reverse) Repo rate by 25bps to 6.5% and 5.25% respectively. Aside from that, central bank also eased various macro prudential policies. During the week, Indonesia DMO office issued samurai bond worth of ¥100 bn. Two series were issued which are RIJPY0619 with tenor of 3y (Coupon: 0.83%) and RIJPY0621 with tenor of 5y (coupon: 1.16%). Both of the series was sold at par.

Total trading volume at secondary market for the government segment was noted thin amounting Rp48.79 tn during last week with FR0056 (10y benchmark series) as the most actively traded. On the corporate segment, total trading volume was noted heavy amounting Rp4.69 tn with BBRI01BCN2 (Shelf registration I Bank BRI Phase II Year 2016; B serial bond; Maturity date: 4 Feb 2019; Rating: _idAAA) as the most actively traded bond.

Foreign ownership stood at Rp637.3 tn or 39.1% of total tradable government bond as of June 9^th. Considering a 2 day’s settlement, Foreigner booked net buy worth of Rp14.48 tn within the month of June and are the biggest buyer. During the same period, banking sector sold Rp15.40 tn.

We reiterate that IGS remain attractive noting down that (1) FFR hike might come in somewhere in the 4Q16, (2) monetary easing recently by the central bank would result in IGS prices to move higher. This move could also help consumption slightly higher thus contributing to a better economy growth in 2H16. (3) Indonesia is running with the most widen real interest rate compared to its peers making it attractive. On the other hand, its fundamental remains to be decent enough. (4) Some incoming funds due to tax amnesty are expected to flow to the IGS market. With declining supply, these funds may enter through the secondary market, dragging IGS prices higher and (5) expectation of tax exempted on IGS. We reiterate a Buy Call on FR0073 (15y benchmark series) with an expectation that the yield to reach 7.60% in 3Q16. Aside from the above consideration, FR0073 last supply would be on upcoming conventional auction this week and the next auction for this series will be on Aug 2^nd. FR0073 yield closed at 7.863% (MDur: 8.44) as of Jun 17^th and is much more attractive compared to FR0072 yield of 7.834% (MDur: 9.84). This week, we believe that IGS price will close higher despite minimal data release. We see that during the bi-weekly conventional auction this week, incoming bids would remain heavy while awarded bids would be within the range set which is between Rp12 tn – Rp18 tn. This would trigger bidders which fail to obtain their bulk size orders to purchase it through secondary market thus bringing IGS auction series price higher.