Weekly Debt Research (07-11-Mar-2011) Rally on robust foreign fund inflows - Mandiri Sekuritas

Review: Yield curve continued shifting downward on robust foreign fund inflows. Foreign fund inflows were still the dominant factor in sustaining the bond market rally. Foreign holding of the government’s rupiah bonds amounted to more than Rp205tn as of 11-Mar, increasing by Rp5.2tn from a week earlier. Thus foreign holding of the government bond was almost 31% of the total amount. The significant rally for the week especially in the short- to medium-term bonds made the yield curve steepened as the spread between the 10-year and 2-year yields rose by 20bp s to 1.6 2ppt from the previous week. The 10- year bond yield reached 8.37% on 10-Mar-11 (the lowest since 13-Jan-11) but hiked on Friday following Japan’s natural disaster. The rally resulted in the total return investing in the government bonds of over 0.6% as of the end of the Mar 7-11 week. However, total return investing in government bonds still reported negative year-to-date return of 1.4%.

Trading was solid following strong demand on the last auction. The rally happened in relatively solid market as total transaction in the secondary market increased significantly to Rp9tn, increasing by almost double from the previous week. The most actively traded security was the medium- to long-end tenors such as the 16-year FR56 and the 6-year FR55. The FR56 traded at 93, down by 3 percentage points yielding 9.23% from the previous week. Meanwhile, the FR55 was up by 1.3 percentage points to 98, yielding 7.83%.

Government sells Rp7tn on the latest auction. The government again sold more than its target on the latest auction, raising Rp7tn vs. Rp5tn target. Total bids reached Rp20.1tn relatively the same with the previous auction. Bid-to-cover ratio was also relatively high of 2.9x indicating strong demand. High demand was for the short tenors i.e. 1-year SPN which attracted bid of Rp6.9tn–or almost 35% of the total bids. Average yield awarded for the SPN was 6.48% with the highest yield awarded being 6.5% or 9bps lower than in previous auction or 7bps above our estimate 6.42% (6.4%-6.43%). Meanwhile, for the 5-yr FR55 and 15-year FR56, the average yield awarded were 8.02% and 9.39% with the highest yield awarded 8.03% and 9.5% respectively or in line with our estimate. The Government again canceled the 10-yr FR53 issuance as investors bid for relatively high yields of between 8.53%-8.75% -our fair yield estimate was 8.6% (range: 8.55-8.65%). Thus the government has issued Rp45.1tn or more than 22% of the total target issuances this year.

What’s new?
Interest rate policy mixed. The Bank of Korea raised the benchmark rate by 25 bps to 3% to curb inflation which was 4.5% in February, higher than central bank’s upper end target of 4%. On the same day, The Reserve Bank of New Zealand lowered its policy rate to 2.5% from 3% to shore up the economy following the earthquake in Christchurch. Next week, the US and Indian central banks will meet. Market consensus expected the US FFR will stay at 0.25% while India will raise again the reverse repo rate by 25 bps to 5.75%.

Government moves ahead with plan to issue global bonds. The government also plans to issue global bonds, with the USD global bonds likely in 1H, while the samurai and global sukuk expected in 2H. Last year global bond issuance was less than 16% of the total gross issuances. This year, the government is projected to issue global bonds amounting to 15-25% of its target or between Rp30tn and Rp50tn (USD3.4bn-5.7bn, with current IDR exchange rate of 8,780). According to the Bloomberg, almost USD13bn sovereign Yanke e bonds issued YTD and JPY240bn of samurai bonds. The latest issuer was Turkey which issued 10-year samurai bonds totaling JPY180bn with coupon rate of 1.87%. Turkey has BB ratings from S&P and Ba2from Moody’s. This week, Moody’s Investors Service cut Greece’s and Spain’s sovereign rating from Ba1 to B1 and AA2 to AA1.

Outlook: Japan’s disaster might affect Indonesian bond market. The impact on Japan's economy is yet to be seen; particularly if its nuclear power plant failure triggers radioactive disaster. Any slowdown in the economy will have unfavorable impacts on Indonesia, given the country’s biggest share on Indonesia’s exports and investment. In 2010, the exports to Japan reached $25.8bn or constituted 16.3% of the total exports and Japan registered US$0.7bn of direct investment in Indonesia, or 4.3% of the FDI. On the global news, some of the biggest private investors in the US bond market, from fund managers to insurers and pension funds, are preparing for an end to the three-decade US Treasury rally, as interest rates are near zero and unprecedented spending by the U.S. government and the central bank threaten to fuel inflation. The earthquake that devastated Japan caused insured property losses of $15bn to $35bn according to Boston-based AIR Worldwide estimated. We still maintain our fair yield forecasts for the 2, 5, 10 and 20 years at 7.7% (range 6.9%-8.4%, 95% confidence interval), 8.6% (range 7.8%-9.4%, 95% confidence interval), 9.4% (range 8.5%-10.2%, 95% confidence interval) and 10.4% (range 9.7%-11.1%, 95% confidence interval) respectively assuming BI rate at 7%, inflation at 6.6% and rupiah at 8,762 by YE 2011.

Another syariah auctions. The government will hold the second syariah bond auction Tuesday, targeting to raise Rp1tn. The government will reopen the 6-year IFR05, 14-year IFR07, 19-year IFR06 and 25-year IFR10. e estimate the yields of the IFR05 will be 8.1% (range: 8.05-8.15%); IFR07 9.31% (range: 9.26-9.36%); IFR06 9.8% (range: 9.75-9.85%) and IFR10 10.02% (range: 9.97-10.07%). On the latest syariah auction on Mar-1, the government gave premiums of only 6bps over the conventional bonds due to liquidity risk. The Government so far has issued Rp45.1tn in total bo nds ytd or 22.5% of their target for the entire year.