BII Weekly Bond Report - 11 Nov 14

Consolidation Time

BOND MARKET REVIEW

Indonesia bond market recorded gain last week with a single factor driving it: huge demand during last week conventional bond auction which have given DMO the chance to absorb flow from investor that are bidding with the highest price (lowest yield). With DMO absorbing FR0070 at an average weighted yield of 7.89325%, bond prices rallied in first days of last week. Post auction, bond market was seen adjusting specifically after several published economy data despite was seen manageable and some were in line but was not as what market were expecting. Most of the bond market across Asia this week, recorded gain with China bond market recording the largest gain as the market surged by +1.04% followed by Thailand (+0.72%), India (+0.67%), Indonesia (+0.58%), Malaysia (+0.18%), Taiwan (+0.12%) and South Korea (+0.03%). On the other hand Philippines (-0.43%) and Singapore (-0.13%) bond market booked losses last week.

On a MTD basis, Foreigners added Rp2.47 tn into their portfolio. Foreign ownership stood at Rp462.33 tn or 37.79% of total outstanding government bond as of Nov 6^th. Within the same period of time, banks bought Rp7.01 tn. Within the same period of time, banks bought Rp7.02 tn while central banks sold Rp3.79 tn.

Total trading volume at secondary market for the government segment was noted amounting Rp54.32 tn with average trading volume per day of Rp10.86 tn (vs average per day (Jan – Oct) trading volume of Rp11.24 tn) during last week with FR0070 (10-yr benchmark series) as the most actively traded with total volume reported amounting Rp13.68 tn. Government bond with tenor 5 - 10 years dominated Government bond trading last week. On the credit segment, total trading volume was noted moderate amounting Rp2.72 tn resulting in average trading volume per day of Rp0.54 tn (vs average per day (Jan – Oct) trading volume of Rp0.65 tn) with ASDF02BCN4 (Shelf registration II Astra Sedaya Finance Phase IV Year 2014; B serial bond; Maturity date: 16 Oct 2017; Rating: AAA_(idn)) was the most actively traded bond with total volume reported amounting Rp258 bn. Corporate bond with AAA rating traded the most last week.

DOMESTIC MARKET UPDATE

Manageable domestic fundamental data. Several data were published last week. Despite were not that impressive, yet we might claim the number manageable. Several economic data which were published last week were inflation data, trade balance data and third quarter GDP growth. Volatility of Indonesia bond prices mostly are affected by fund inflows or outflows, better or worsening fundamental data and events (economic and non economic) occurring in Indonesia’s major trading partners. These unattractive published economic data have failed to support Indonesia bond market last week as well.

DMO to conducted weekly auction with indicative target issuance of Rp5 tn. On total, Indonesia government has raised approx. Rp428.0 tn worth of debt through domestic and global issuance which represents 99.5% of this year   target   of   Rp430.2 tn. DMO has cancelled their this week sukuk auction as DMO have almost fulfill their initial target issuance for this year and might plan to slightly exceed their issuance. The final conventional auction will be conducted in the month of December. On the final conventional auction, Indonesia government needs to issues Rp2.9 tn to meet their 4Q 2014 target of Rp24.79 tn. In December, Rp10.94 tn worth of government bond would mature, mostly as VR0019 worth of Rp9.41 tn matures while the rest are SPN series.

We see that market this week would move in a slightly negative tendency with FR0070 (10-yr benchmark series) to move in a range between 8.000% - 8.200%. We believe that bond investor would be focusing more on the release of third quarter balance of payment rather than Indonesia central bank RDG meeting as consensus expect central bank would remain halt its reference rate at 7.50%. Moreover, this week, DMO does not have any schedule for conducting its weekly auction as DMO have almost fulfill their issuance target. We remain firm with our UnderWeight (UW) recommendation as Indonesia government plans to increase the subsidize fuel price in coming weeks which would trigger an additional inflation.