Weekly Debt Research (01-Mar-2011) Inflation data will be watched carefully - Mandiri Sekuritas

Review: government bond prices were relatively flat during the week. Bond market was stable although the high demand during the auction last week. The market is still waiting for the release of the inflation data for February and the next few months. The political tension in the Middle East and North Africa, which drove oil prices above US$100 per barrel (+13.5%) during the week raised concern inflation will accelerate and threaten global economic growth. < /SPAN>This concerns sent the US Treasury curve shifting downward, with the 10-year note closing down by 13bps to 2.83% at the end of the week, while the 2-year yield also decreased slightly to 0.7% (-4bps) . Meanwhile, the Indonesian government rupiah yield curve was stable, as the 2-year tenor closed down slightly at 7.36% from the previous week, while the medium tenor 10-year was 8.79% at the end of the week, down by 1bps compared with the previous week. Thus, the 10- year yield spread between the rupiah and US Treasury note widened to 5.4ppt. Elsewhere, the rupiah continued to appreciate at Rp8,838 against the US dollar, keeping the local bonds attractive especially for foreign investors. In real yield term, the rupiah bonds are also attractive compare with Vietnam and Thailand. The 10-year rupiah real yield is trading at 1.8ppt, meanwhile Vietnam and Thai real yields were -0.26ppt, 0.86ppt respectively. The Philippines is also giving relatively high real yield i.e. 3.94ppt. Foreign investors were still net buyers during the week, increasing their holdings by Rp3.1tn to Rp201.9tn. Although total foreign ownership increased, but the portion to total outstanding decreased from 30.6% to 30.8% during the week. Foreigners continued to buy the medium tenors i.e. 5yr-15yr where they increased ownership by Rp1 .5tn to R p98.1tn from the previous week according to the ministry of finance’s data as of 25-Feb.

Trading volume improved, foreigners continued to buy. Average trading volume of the transaction in the secondary bond market was reported to rise significantly to Rp7.3tn per day, almost doubling vs. the previous week of only Rp4.4tn. However, the most actively traded note was the Sukuk Retail series 3 i.e. SR003 as the bond started trading in the secondary market where institutional investors are allowed to buy. Excluding the sukuk retail, the most actively traded security was again the long-end tenor series i.e. 2 0-year F R54 which increased slightly by 0.6ppt to 96.

Fitch upgraded Indonesian sovereign rating outlook. The outlook of Indonesia's credit rating was raised from stable to positive by Fitch ratings agency on Thursday. The positive outlook indicates improved macroeconomic prospects which could surely strengthen further credit profile. Indonesia's economy in the 4Q expanded to the fastest pace in six years to 6.9%yoy as exports, investment and consu mption p ick up. Bank Indonesia predicts the economy to continue accelerating by 6.4% in the 1Q2011 and at the rate of 6.0%-6.5% in 2011. It’s also in line with our economist's expectation of 6.3% this year. Indonesia’s foreign exchange reserves reportedly rose to USD97bn in the third week of February after gaining to USD95bn at the end of January. The figure is equal to six months of imports. Before, Moody’s raised Indonesia’s sovereign credit rating 1 notch to Ba1 in Jan 2011, while Standard and Poor's raised to BB from BB- with positive outlook in March 2010 .

Indonesia’s Yankee sovereign bonds also improved this week following decreasing US Treasury yield and upgrade on rating outlook by Fitch. Indonesia USD 8yr yield trading at 5.01% down by 13bps from the previous week or giving almost 2.1ppt over US Treasury yield- slightly higher than last one week i.e. 1.9ppt. However, we think the market has already priced in Indonesia at higher rating than Fitch (BB+), S&P (BB) and Moody’s (Ba1).

Outlook: Inflation figure and auction will be the most influential factors for this week. There are two event that will influence the bond prices this week i.e. February’s inflation and bond auction. If inflation is lower than market expectation and the bid for the government bonds auctions is high, the secondary bond market will get a boost this week. Market consensus expected headline inflation will be higher slightly in February to 7.13% y-o-y vs. 7.025%, and also higher core inflation of 4.34% y-o-y vs. 4.18% in Jan-10.

The first syariah auction this year. The government will hold the first syariah bond auction today, targeting to raise Rp1tn. The government will reopen the 6-year IFR05, 14-year IFR07, 19-year IFR06 and two new series 10-year IFR09 and 25-year IFR10. We estimate the yields of the IFR05 will be 8.55% (range: 8.5-8.6%); IFR07 9.67% (range: 9.62-9.72%); IFR06 10.1% (range: 10.05-10.15%), IFR09 8.9% (range: 8.85-8.95%) and IFR10 10.44% (range: 10.39-10.49%). On the latest syariah auction on Oct-2010, the government gave premiums of between 16bps to 27bps over the convent ional bonds due to liquidity risk. The Government so far has issued Rp36.6tn in total bonds ytd or 18.2% of their target for the entire year.