CIMB IDR Weekly Fixed Income Market Commentary ended 17 April 2015

 
Indonesia government bond market weakened for the week ended Apr 17, with yields increased by about 15 to 25bps along the curve. Higher energy price was mainly the reason behind weaker bond performance as domestic fuel price could be increased next month and push up inflation. Stronger Rupiah on the other hand was supporting the domestic bond market. Meanwhile, average trading volume improved to about IDR12.16 trillion per day.
Government conducted a regular bond auction last week and absorbed IDR8.6 trillion from incoming bid amounting IDR10.01 trillion. Weak bond auction result was in line with the bond market performance. Average weighted yields were generated at 5.99% for 9-month T-bills, 7.24% for FR69 and 7.51% for FR71. At this moment, the government has issued a total of IDR191.44 trillion year-to-date, from annual gross target of IDR452 trillion (budget revision).
This week government will conduct a regular Islamic bond auction with indicative target of IDR2 trillion, which includes 6-month T-bills, Project Based Sukuk PBS06 (maturing in 2020), PBS07 (maturing in 2040) and PBS08 (maturing in Jun’16).
Bank Indonesia kept interest rate steady at 7.50% last week. High interest rate is intended to reduce current account deficit and manage inflation expectation. On the flip side, high interest rate is negative for the bond market.
In our opinion, the bond market may see support, guided by the narrowing yield spread between the 3- and 10-year government bond and widening spread between IRS and bond. Stronger Rupiah is also positive for bond market. However, higher energy price could negatively affect domestic bond market. Hence, we view that the bond market could weaken marginally this week.
In credit market, we saw slightly thinner flows with average volume of IDR488 billion per day. Market interest returned to the highest grade papers AAA compared to the previous week’s more diversified bonds. The most actively traded bonds were Bank UOB Indonesia Apr’16 (AAA) and Sub. Bank Capital Jan’22 (BBB-).