Government bond auction commentary (Still) Strong demand for long-end tenors - Mandiri Sekuritas

The government again sold more than their target on the latest auction, raising Rp5.5tn vs. Rp5tn target today. Total bids reached Rp13.1tn slightly lower than the previous auction. Bid-to-cover ratio was also down from 3.4 to only 2.4. High demand was still for the longest tenor i.e. 20-year FR54 which attracted bid of Rp6.1tn–or 47% of the total bids. Average yield awarded for the FR54 was 10.01% or 17bps lower than in previous auction or in line with our estimate. Meanwhile, for the 1-yr SPN25 and 15-year FR56, the average yield awarded was 6.55% and 9.54% with the highest yield awarded 6.59% and 9.63% respectively or below our estimate of 6.94% and 9.68%. For the 5-year FR55 the average yield awarded was 8.22% with the highest yield awarded 8.31% much higher than our estima te of 8. 13%.

Thus, the government has issued Rp16.8tn gross ytd (8.3% of target FY2011) or Rp14.2tn nett (11.2% of target FY2011). In 1Q 2011, the government targeted to raise Rp38.5tn from bond issuances excluding retail and global bonds.

Market reaction to the results of the auction was muted. According to our MSGBI (Mandiri Sekuritas Government Bond Index) average bond prices only rose slightly by 0.03% or still recorded -5.5% ytd. We still maintain our shortening strategy as we believe that in the near term inflation rate will continue to pick up (see our latest weekly bond market commentary report: “Short term cheers but in very thin market” 7-Feb).