BII Weekly Bond Report - 25 Mar 14

Moving Within a Range

GLOBAL MARKET UPDATE

FOMC result: continuation of further QE3 pace reduction by $10 bn starting in April and maintain Fed fund rate at 0.25%. At least 8 out of 9 FOMC members voted for another cut by $10 bn of Fed’s QE3 pace to $55 bn. Beginning in April, Fed will purchase agency mortgage-backed securities at a pace of $25 bn per month and longer-term treasury securities at a pace of $30bn. Beside reducing the QE3 pace, FOMC also shifts its forward guidance and will now base it on a wider range of information such as measures of labor market conditions, indicators of inflation pressures and inflation expectation and readings on financial developments. In other words, a combination of quantitative and qualitative measure. Both U.S. and Indonesia bond market extended its decline after the FOMC result press release as investor haven’t dissolve Yellen’s statement of “Fed fund rate hike” which she told will be around 6 month after winding down of the QE3 buying program. The Fed statement was actually dovish as Yellen emphasize that Fed fund rate would remain at its present range of 0.25% as long as inflation rate runs below 2% long term target.

UST 10-yr notes yield closed at 2.744% at the end of last week. Mid tenor yield losing the most with UST 5-yr and 10-yr yield shifted up by 17.3bps and 8.8bps to 1.709% and 2.744% respectively UST 2-yr yield shifted up by 8.2bps to 0.429% at the end of last week trading.

DOMESTIC MARKET UPDATE

Foreigner entered long end tenor during the bond rally with foreign financial institution buying the most. At least from beginning of this year till March 19^th, 2014, foreigner has added up Rp37 tn in Indonesia bond market. We do know that the rally in the local bond market was trigger by a foreign inflow during the month of February till the mid of this month. FR0070 (10-yr benchmark series) have gained by approx. 90 bps since the start of February. Foreigner added most of their portfolio in the 5 to 10 year bond tenors. During February 2014, inflows from foreign institution companies were seen amounting Rp10.2 tn. This could also means that Indonesia bond market is now more vulnerable as chances of foreign outflow becomes higher if key economy data does not keep on improving.

Government buyback bond amounting Rp410.9 bn through secondary market. Indonesian government buy backed several outstanding bond series which are less liquid and that will mature by 2014 – 2015 amounting Rp410.9 bn. The buyback program is intended for managing government securities portfolio through reduction of less liquid outstanding government securities or which are been issued with a high coupon yet still considering the cost-effectiveness of government financing.

Final 1Q 14 sukuk auction to be conducted this week. DMO to conduct final sukuk bond auction in first quarter of 2014 on Tuesday, March 25^th, 2014 with total indicative auctioned amounting Rp1.5 tn. Four series to be auctioned this week are SPN-S12092014 (Coupon: discounted; Maturity: 12 September 2014), PBS003 (Coupon: 6.000%; Maturity: 15 January 2027), PBS005 (Coupon: 6.750%; Maturity: 15 April 2043) and PBS006 (Coupon: 8.250%; Maturity: 15 September 2020). We see that upcoming sukuk bond auction will remain receiving good demand and sees the indicative yield for certain series as follows PBS003 (range: 8.700% – 8.800%), PBS005 (range: 8.830% – 8.930%) and PBS006 (range: 7.850% – 8.000%). On   total, Indonesia government has raised approx. Rp176.0 tn worth of debt through domestic and global issuance which represent 48.62% of this year target of Rp362.01 tn which indicates a successful front loading policy. Here on forwards, we do see there would be a supply squeeze in government bond issuance through auction despite a 2014 budget assumption revision due to IDR and oil lifting assumption revision which may result in an additional issuance of Rp15 tn – Rp25 tn. We are confidence that Indonesia would receive good demand at every upcoming auction (17x conventional auction and 16x sukuk auction left). At least till the date of this report, on average DMO received incoming bids amounting Rp29.82 tn on conventional bond auction segment and awarded Rp12.88 tn (average bid to cover: 2.32x) while on the sukuk bond auction, DMO received Rp4,91 tn at an average and awarded Rp1,28 tn (average bid to cover: 3.84x).

Further this week, we see that bond market might move within a range as there will be minimum market sentiment moving the bond market with a weakening tendency as Investors would be waiting for March CPI and trade balance result which is planned to be published by April 1^st, 2014. Our economist sees that March headline CPI would continue easing down while trade balance would book a surplus. More detail in regards to our economist prediction on March headline CPI and trade balance will be published soon this week.

BOND MARKET REVIEW

Indonesia bond market moved mixed last week. As we mention in our previous week report, Indonesia bond market moved within a limited range last week as the bond market kept on ascending on the first couple of days of the week mainly due to Jokowi announcement euphoria. The bond market slowed down on Wednesday as investors were looking forward on FOMC meeting results. The FOMC meeting result was misinterpreted by investor which abided that Yellen, Fed chairwoman gave a rather hawkish statement. Only after the market realized that Fed fund rate would only rise if both unemployment rate and inflation have passed their threshold and other qualitative measures met Fed’s expectation, Indonesia bond market corrected positively on Friday. Beside the FOMC meeting result, on a separate report, J.P. Morgan decrease Indonesia’s weighting from 8.00% to 7.42% in their GBI-EM Global Diversified Index as J.P.Morgan increased Colombia’s weighting to 5.6% from 1.8%. Other countries affected by the Colombia weighting hike are Turkey, Russia, Thailand and Hungary. Most of the bond market within the region booked losses last week, except for India, Malaysia and Indonesia bond market which closed higher by 0.48%, 0.12% and 0.05% respectively last week.

Yield curve bear steepening on both the IDR segment while on the USD segment yield merely changed. On average, yield shifted up by 3.75bps on the IDR government bond segment while on the USD segment yield slightly shifted up by 0.95bps within the week. In the IDR Segment, FR0066 (4-yr) gained the most by as yield shifted down by 12.1bps with last price closed at 91.837 yielding 7.581% while FR0040 (11-yr) shifted up by 14.9 bps with last price closed at 118.891 yielding 8.402% at the end of last week. Overall, mid to long end tenor bond lost the most last week on the IDR segment. On the USD segment, RI0018 (4-yr) gained the most with yield shifting downwards by 5.4bps last price closed at 114.009 yielding 2.957% while RI0015 (1-yr) yield shifted up by 8.0bps with last price closed at 106.395 yielding 1.197%.

Trading volume on government and corporate segment remains heavy. Total trading volume at secondary market for the government segment was noted amounting Rp63.55 tn with average trading volume per day of Rp12.71 tn (vs average per day trading volume of Rp7.60 tn) during last week and was relatively liquid with 606x transaction frequency on average (vs average transaction frequency per day of 492x) with FR0069 (5-yr benchmark series) and FR0068 (20-yr benchmark series) as the most actively traded with total volume reported amounting Rp13.65 tn and Rp10.74 tn respectively. FR0069 closed at 100.528 yielding 7.745% while FR0068 closed at 97.617 yielding 8.627%. Government bond with tenor between 5 till 10 years dominates Government bond trading last week.

On the credit segment, total trading volume was noted amounting Rp3,423 bn during last week resulting in average trading volume per day of Rp685 bn (vs average per day trading volume of Rp750 bn) and was relatively liquid with 99x transaction frequency on average (vs average transaction frequency per day of 81x). BMTR01B (Global Mediacom I Year 2012; B serial bond; Maturity date: 12 Jul 17; Rating: idA+) was the most actively traded bond with total volume reported amounting Rp434 bn. Corporate bond with AA+ and A rating dominate the credit segment last week.

Foreigner continues entering Indonesia bond market. Based on Indonesia Debt Management Directorate General (DMO) data as of March 21^st, 2014, Foreign Ownership continue entering Indonesia bond market mainly through secondary market with foreigner recorded as largest net buyer amounting of Rp7.5 bn between 13 – 19 March. Foreign ownership stood at Rp360.91 tn with proportion level of 33.66%. Banks and foreigner was the biggest buyer during the final 1Q 14 conventional auction last week with total buying amount of Rp6,480 bn and Rp2,510 bn respectively.