CIMB IDR Weekly Fixed Income Market Commentary ended 22 May 2015

·         Indonesia government bond market weakened for the week ended 22 May, with yields increased by about 5-10bps along the curve, especially on the front end and the bellies. Global bond market sell-off due to hawkish commentary by Fed’s governor Janet Yellen and Bank Indonesia decision to keep interest rate high were the main reasons behind weak domestic bond market. Indonesia debt rating outlook upgraded by S&P has yet to support the bond market. Meanwhile, average trading volume eased considerably to about IDR11.3 trillion per day.
·         Government conducted a regular Islamic bond and a global Islamic bond auctions last week and absorbed approximately IDR28.51 trillion in total. The 10-year global Sukuk auction drawn USD6.8 billion incoming bids and yielded 4.325%. At this moment, the government has issued a total of IDR240.60 trillion year-to-date, from annual gross target of IDR452.19 trillion.
·         This week government will conduct a regular bond auction with indicative target of IDR10 trillion, which includes 9-month T-bills, Fixed Rate FR70 (maturing in 2024) and FR68 (maturing in 2034).
·         Bank Indonesia kept interest rate steady at 7.5% to control inflation and current account deficit. BI and OJK have yet to announce the new reserve requirement/ lending-to-deposit ratio regulation. They also have not issued the new loan-to-value ratio for housing and vehicle loans. Standard & Poor’s upgraded Indonesia debt rating outlook to positive from stable and could upgrade the rating to investment grade within a year from now.
·         In our opinion, in the medium to long term the bond market may see support, guided by high yield and also possibility of rating upgrade. However market sell-off in the global bond market and anticipation of high inflation pressure in the coming months due to fasting month could weaken the domestic bond market. Hence, we view that the bond market could weaken this week especially on the front end of the curve.
·         In credit market, we saw much smaller flows with average volume of IDR411 billion per day. Market still focused mainly on AAA rated papers and spread over government bonds narrowed. The most actively traded bond by volume was Summarecon Apr’18 (A+) and by frequency was Pegadaian May’16 (AA+).