Review: Government bonds yielded 22.3% return in 2010. The Indonesian government’s rupiah bond market continued the rally in 2010. According to our Mandiri Sekuritas Government Bond Index (MSGBI), after recording total return of 20.4% in 2009, the return continued to rise to 22.3% in 2010- higher than the long term average return of 15.5%. However, in terms of US$, total return investing in the bond in 2010 increased to 26.1% as the rupiah appreciated against the US dollar by around 3.8%, much below than 2009 of 35.8% - as the rupiah appreciated by 15.4% against US$.
Robust foreign fund inflows were still as the key drivers of the bond market rally in 2010. Foreign investors’ holdings increased significantly to 30.5% (Rp195.3tn) of tradable government bonds in 2010 from 18.6% (Rp108tn) in 2009. Banks were the highest net sellers of government bonds as they sold total Rp34.8tn, reducing their outstanding bond holding to Rp219.5tn as of end 2010.
Yield curve backed to normal shape from steepened in 2009. The yield on the 10-year Treasury note fell to a historical low of 7% in mid October before rising up again to 7.9% on 24-Dec, but closed slightly lower to 7.61% YE2010. Yield curve was back to normal shape with the slope of short to long-term yields (10/2 yield spread) around 1.7ppt YE 2010 (with average 1.6ppt). During 2009, the average spread between 10-yr and 2-year yields was 2.2ppt.
Liquidity was also improving. Activities in the secondary market improved significantly in 2010. The average daily trading value almost doubled to Rp5.4tn from Rp3tn in 2009. Corporate bonds liquidity also improved significantly in 2010 following increasing demand from pension funds who shifted some their portfolio from government bonds to corporate bonds to enhance their average portfolio yield. The average daily trading corporate bonds was Rp360bn, or higher 144% compared to! 2009.
What’s new?
The central bank and the government are considering establishing a bond stabilization fund to support bond prices in the event of a sudden reversal of foreign fund inflows. According to Agus Suprijanto –acting head of the Fiscal policy at the Finance Ministry, there are three priority sources of bond stabilizing funds: (1) from contingency budget (in 2011 there’s projected to be Rp2tn). (2) Funds from standby buyers consisting of 5 SOE (BMRI, BBNI, BBRI, Taspen and LPS-Indonesia Deposit Insurance Corporation) but he didn’t mention the total amount as it depends on their cash flow. Based on financial statements for the 9mo 2010, SBI ownership of BMRI, BBNI and BBRI totaled Rp23.5 trillion. Taspen’s investment fund was estimated around Rp31.5tn with Rp4.8tn being in time deposit. Meanwhile, LPS’s investable fund was reported to be Rp24tn, with average additional Rp4tn per year from increasing third party funds and reinvestment. (3) From excess budget (projected to be Rp66.8tn from the excess budget in 2010). Thus on optimist calculation total stabilization fund is projected below than Rp100tn. Meanwhile, BI recorded that foreign funds pumped into the debt and stock markets had total Rp114.4 trillion (US$12.7 bn) as of Dec. 19. Of this figure, as much as Rp10 trillion was in BI’s promissory notes (SBI), Rp84.9 trillion in the government bonds (SUN), and Rp19.5 trillion in equities.
BI had taken several measures to limit the placement of the hot money in short-term investment instruments, such as SBI, by (1) suspending the issuance of SBI with one and three-months maturities, while introducing nine month SBI. (2) BI requires SBI buyers to hold the notes for at least one month before selling them in the secondary market. (3) The central bank has also issued investment instrument called “term deposits”, which cannot be resold on the secondary market.
New policies from Bank Indonesia. Bank Indonesia announced 23 new policies on Wednesday with the following objectives (1) strengthening monetary stability (2) boosting banking intermediary role (3) increasing banking security (4) strengthening macro prudential policy and (5) strengthening supervisory function. The new rulings include (1) limit on bank’s short term foreign borrowings at maximum 30% ! of the ba nks’ capital (vostro account), (2) require banks to announce base lending rates through mass media, bank’s announcement board and websites, (3) increase foreign currency minimum Reserve Requirement from 1% to 5% on 1 Mar 11 and to 8% by 1 Jun11 and (4) decrease RWA of micro credit calculation from 85% to 75% for mid sized commercial banks.
Outlook: Rising debts and higher inflation expectation are the main risks this year for the rupiah bond market. Higher issuance of government bonds is inevitable as the government uses this as the main sources of funding for budget deficit, debt refinancing and also infrastructure support. The budget deficit is expected to be 1.8% of GDP or Rp124.7tn in 2011. Although the deficit was lower than 2010 (Rp133.7tn), the nett issuance of g! overnment bonds is expected to be higher around Rp126.7 trillion- as the government reduces offshore loan (Rp57tn in 2011 from Rp70.8tn in 2010). As maturing bonds will reach Rp67.4tn, the government will have to issue Rp210tn in gross amount, including bond buyback. The government will hold its fist bonds auction for this year on 18 Jan with tenor of 1 year, 10 years and 20 years. In 1Q 2011, the government targeted Rp 38.5tn bond issuances excluding retail and global bonds, this is slightly lower than 1Q 2010 target issuances of Rp37.4tn.
On the inflation front, after reporting low inflation in the last two years, we expect inflation should start to increase in 2011 along with accelerating economic activities, increasing commodity prices and credit expansion. December inflation was released today, market consensus expected headline inflation and core inflation will be higher to 6.71% yoy and 4.40%yoy respectively. Our economist expect headline inflation will be higher to 0.94% mom, bringing the FY10 inflation to 6.97% yoy, higher than central bank’s 2010 inflation target of 5% ± 1%. Seasonal factor and unfavorable weather have driven food inflation. Rice and chili prices have been reportedly to increase notably in several cities. In addition, higher gold and non-subsidized fuel prices, coupled with weaker currency would drive the core inflation components up in the corresponding period.
In 2011, we expect shortening bullet portfolio will be outperforming assuming the yield curve to be bearish steepening. However, we recommend the barbell strategy if the 20-yr bond is higher than 10%. We don’t expect significant increase in yields as buying opportunities should arise with most investors still having high liquidity at their disposal. To enhance the return, we also suggest overweight on corporate bonds with good ratings as their risk premiums are still higher than the average long-term sp! read. Good economic growth will drag risk premium lower this year (See our latest strategy report: Path to higher yield 27-Dec for the detail).
Tidak ada komentar:
Posting Komentar