BII Weekly Bond Report - 21 Apr 15

Moving Within A Tight Range

BOND MARKET REVIEW

Indonesia bond market closed lower supported by the worst performing bond auction last week as well as increasing world oil price to US$55.74 which may trigger an increase in fuel price thus may increase Indonesia’s inflation in the future. The decline occurred amid domestic March trade balance data was noted better than expected, Rupiah appreciation by 0.58% to Rp12,830 per USD while U.S. economic data continue weaken. U.S. March retail sales YoY came in at 1.30% YoY or lower compared to previous publish data of 1.68% YoY while U.S. March inflation came in at -0.10% YoY far compared to Fed’s year end inflation target of 0.60% YoY - 0.80% YoY. As a result, UST 10y yield dropped from 1.96% to 1.87% at the end of last week. Rebalancing of portfolio were seen last week where long end tenors bond were sold with a purchase of front end tenors one’s. Average trading volume per day last week (excl. SR007 trading volume) was seen quite thin which indicates a slowdown of transaction in Indonesia bond market last week. Overall, market across the region moved mixed last week with China bond market leading with an incline of 0.64% followed by Thailand (+0.12%), Taiwan (+0.11%), India (+0.07%) and Philippines (+0.01%). On the other hand, Indonesia bond market booked the largest loss (-1.22%) followed by South Korea (-0.17%), Singapore (-0.12%) and Malaysia (-0.01%).

Foreign ownership stood at Rp505.9 tn or 38.34% of total tradable government bond as of Apr 17^th. Foreigner booked net sell worth of Rp1.05 tn last week. On MTD, foreigner booked a net buy worth of Rp1.86 tn.

Total trading volume at secondary market for the government segment was noted amounting Rp61.99 tn with average trading volume per day of Rp12.40 tn (vs average per day (Jan – Dec) trading volume of Rp12.70 tn) during last week with SR007 (3y) as the most actively traded with total volume reported amounting Rp12.40 tn. On the corporate segment, total trading volume was noted thin amounting Rp2.45 tn resulting in average trading volume per day of Rp0.49 tn (vs average per day (Jan – Dec) trading volume of Rp0.75 tn) with BBIA01A (Bank UOB Indonesia I Year 2015; A serial bond; Maturity date: 11 Apr 2016; Rating: AAA_(idn)) as the most actively traded bond with total volume reported amounting Rp202 bn.

DOMESTIC MARKET UPDATE

March Trade Balance came in Surplus while reference rate halts at 7.50%. Indonesia trade balance during March came in doubled the consensus expectation supported by non oil and gas net export. Non oil and gas exports hiked by 12.50% MoM to US$11,721.9 mn supported by mineral exports which jumped by 23.61% MoM while non oil and gas imports grew by 5.32% to US$10,311.2 mn. Net non oil and gas export in our view occurred amid weakening Rupiah currency and commodity prices. However, bond market failed to response positively on the published data and maintained BI Rate. As we mentioned above, strengthening energy price have hinder the strengthening of bond prices. Bank Indonesia conducted Board of Governors meeting last week which resulted in halting their reference rate, deposit rate and lending rate at 7.50%, 5.50% and 8.00% respectively.

Weekly auction with an indicative target issuance of Rp2 tn. DMO will conduct their sukuk auction this week with four series to be auctioned which are SPN-S08102015 (Coupon: discounted; Maturity: 8 Oct 2015), PBS006 (Coupon: 8.250%; Maturity: 15 Sep 2020), PBS007 (Coupon: 9.000%; Maturity: 15 Sep 2040) and PBS008 (Coupon: 7.000%; Maturity: 15 Jun 2016). We believe that the auction will be oversubscribe by 1.5x – 2.5x from its indicative target issuance while our view on the indicative yield are as follows SPN-S08102015 (range: 5.820% – 5.920%), PBS006 (range: 7.500% – 7.600%), PBS007 (range: 8.280% – 8.380%) and PBS008 (range: 7.050% – 7.150%). Till last week, Indonesian government has raised approx. Rp11.3 tn worth of debt through bond auction in 2Q 15 which represents 13.5% of the 2Q 2015 target of Rp83.5 tn. On total, Indonesia government has raised approx. Rp191.4 tn worth of debt through domestic and global issuance which represent 42.4% of this year target of Rp451.8 tn.

This week, we see Indonesia bond market would move within a tight range as economic data both globally and locally will be minimal. However, we suggest a buying on dips strategy as we do believe that the potential of further climb in bond prices remains open especially if the 10y yield touches 7.70%. Chance of an incline in bond prices would come with several reason such as declining U.S. treasuries, sluggish U.S. economy condition, recent cut in China’s reserve ratio requirement to 18.50% and an attractive Indonesia government bonds yield. However is constraint by inclining oil price. We see the 10y yield to move within the range of 7.450% - 7.550% this week.