BII Weekly Bond Report - 12 May 15

Slowing 1Q GDP hurts LCY Bond Market

BOND MARKET REVIEW

Indonesia bond market closed with significant losses during last week. Amid a slightly better inflation data compared to consensus, bond prices slumps on the note of slowing 1Q 15 GDP data, BI governor statement that Rupiah currency may further depreciate, Rupiah depreciation itself, Fed Yellen warning of a spike in US treasuries yields when Fed start raising the Fed Fund Rate (FFR) and a slightly lower April foreign reserve. What was interesting is, during the slump in LCY bond prices last week; we see there was minimal pressure from foreign investor side. Foreigner booked a net buy instead of net sell during the bond prices slump. Our Singapore FX analyst on their separate report continue to believe that Rupiah at the end of 2Q 15 would reach Rp13,150 per USD before climbing to around Rp13,500 per USD. During the weekend, China central bank cuts its reference rate by 25bps to 5.1% to support a healthier development of the economy. 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 Rp508.3 tn or 38.55% of total tradable government bond as of May 7^th. Foreigner booked net buy worth of Rp0.14 tn between beginnings of the month till May 7^th. On the other hand, banking sector booked net sell of Rp1.38 tn. However, this net sell was not really a sell trades yet due to maturing SPN12150501 and SPN03150504.

Total trading volume at secondary market for the government segment was noted amounting Rp57.14 tn with average trading volume per day of Rp11.43 tn (vs average per day (Jan – Dec) trading volume of Rp12.70 tn) during last week with FR0070 (10y benchmark series) as the most actively traded with total volume reported amounting Rp12.84 tn. On the corporate segment, total trading volume was noted thin amounting Rp2.71 tn resulting in average trading volume per day of Rp0.54 tn (vs average per day (Jan – Dec) trading volume of Rp0.75 tn) with FIFA02ACN1 (Shelf Registration II FIFA Phase I Year 2015; A serial bond; Maturity date: 28 Mar 2023; Rating: _idAAA) as the most actively traded bond with total volume reported amounting Rp495 bn.

DOMESTIC MARKET UPDATE

April inflation came in at 6.79% YoY; 1Q 15 GDP slowed to 4.71% YoY while FX reserve decline to US$110.9 bn. Several domestic data came out mixed last week which have given a negative sentiment to domestic bond prices. April inflation came in at 0.36% MoM or 6.79% YoY. However, YTD, Indonesia remain experiencing a deflation of 0.08%. April data came in slightly better than economist consensus which estimates a 0.38% MoM and 6.80% YoY figure. On the other hand, 1Q 15 GDP data came in at 4.71% YoY mainly due to weakening household consumption (+5% YoY), disappointing investment growth (below 5% YoY), sluggish government expenditure growth (approx. 2%) and negative grow of exports. MoF in a conference call last week explained the sluggish government spending in 1Q 15 as it was due to the revised budget was reviewed in January, ratified by the legislative in February and there was a time lag before disbursement may actually start while some ministries were having new names and structures which causes additional delay. According to Mof, Infrastructure spending has started from this month onwards and they expect that Indonesia GDP may grow between 5.3% - 5.7% in 2015. FX reserve for the month of April was published during the final day of last week which showed a declining reserve to US$110.9 bn. BI in an official statement stated that the decline was due to increasing Government external debt payments and to stabilize rupiah exchange rate in accordance with the fundamental. In related to LCY bond market, the slowing down of Indonesia as mentioned above have resulted in a higher bond yield with yield curve bear steepening.

Weekly auction results: Incoming bids: Rp13.30 tn; awarded bids: Rp11.80 tn. Indonesian government conducted their conventional auctions yesterday and received incoming bids of Rp13.30 tn bids versus its target issuance of Rp8.00 tn or oversubscribed by 1.7x. However, DMO only awarded Rp11.80 tn bids for its 3mo, 1y, 10y and 20y bonds. Incoming bids were mostly clustered on 10y tenors. 3mo SPN was sold at a weighted average yield (WAY) of 5.76920%, 1y SPN at 6.52767%, 10y FR0070 at 8.16169% while 20y FR0068 was sold at 8.47925%. No bids were rejected during the auction. Bid-to-cover ratio during the auction came in at 1.04X – 2.50X. Foreign incoming bids during the auction were noted Rp4.88 tn or 36.7% of total incoming bids and were higher compared to Rp2.16 tn bids during previous conventional auction. However, only Rp4.74 tn bids (40.2% of total awarded bids) were awarded to foreign investors. Till the date of this report, Indonesian government has raised approx. Rp31.93 tn worth of debt through bond auction which represents 38.2% of the 2Q 15 target of Rp83.50 tn.

This week, we see Indonesia bond market would move sideways shadowed by negative tone. During the beginning of the week bond market have react positively to lower than expected U.S. NFP data which was released last Friday and China reference rate cut by 25bps to 5.10% during the weekend. Investor would also wait and see on upcoming U.S. retail sales data and 1Q current account data which is expected to be published on Wednesday and Friday respectively. We see the 10y yield to move within the range of 8.000% - 8.400% this week.