The rupiah bond yields continued to fall. The average yield of the government’s rupiah bonds continued to fall to 8.61% on April. 15, to the lowest points in nearly twenty months following foreign fund flows according to the Mandiri Sekuritas Government Bond Index (MSGBI). But the yield slightly increased at the end of the week to 8.63% due to some profit taking by Banks. Foreign investors have added more than Rp3tn to Rp140.1tn during the week, according to the latest data from the Finance Ministry as of 15-Apr. Foreign fund inflows also drove the rupiah higher against the greenback. Year-to-date, the rupiah remains the best performer in the region as it has appreciated by over 4.2%. The yield of the 2-year FR18 closed 13bp lower to 7.11% whilst the 10-year ! FR31 drop ped 28bps to 8.70%. According to our Mandiri Sekuritas Government Bond Index (MSGBI), the total return investing in the government bonds reached almost 1.3% as of the end of the Apr 12-16 week following the rally (8.48% ytd).
The rally happened in solid trading volume mostly coming from long end tenors. Total value of the transaction in the secondary bond market was solid reaching over Rp7tn on average per day. The most actively traded security was the longest tenor series such as the 20-year FR52 and the 18-year FR47, both accounting almost 38% of the total transaction for the week. The FR52 traded at 104.75, up by 1.6percentage point yielding
9.95% from a week earlier. Meanwhile, the FR47 was also up by 1.1percentage point to 101.28 yielding 9.84%. Our fair yields for those bonds were 9.82% and 9.68%, thus we think both are still attractive. There’s also SPN 20100415 bonds mature on 15-April amounting Rp3.95tn.
Sukuk auction results. After absorbing only Rp620bn in the previous auctions, the government managed to raise Rp925bn in the latest sukuk sale. Demand was good, with total bids reaching Rp2.4tn, or higher than in the previous sukuk auctions, i.e. Rp1.7tn. The Government only issued IFR03, IFR06 and IFR08 series with average yields awarded being 8.31%, 10.29% and 9.125%- or in line with our projection i.e. 8.3% - 8.4%, 10.19%-10.29% and 9.1%-9.2% respectively. Investors still bid higher yields for the IFR05, and IFR07 ranging 8.75%-10% and 9.91%- 11% respectively. Meanwhile, our forecast for those bonds were 8.68% (ranging from 8.63%-8.73%) and 9.83% (9.78%-9.88%) respectively. We view positively the government’s continued sukuk auction as more issuance might lessen liquidity risk in the sukuk instrument! s. We bel ieve that liquidity risk is the most influencing factors why investors bid higher yields for sukuk than conventional government bonds.
Government has issued more than 41% of its target. Thus the government has issued Rp73.1tn (incl. global bonds issuances i.e. US$2bn) or more than 41% of the new total target to finance budget deficit, which is projected to be 2.1% of GDP this year. In 2Q, the government's target issuance is Rp29.4tn. Assuming that the government's global bond issuance will raise another US$2bn (samurai bonds & global sukuk) and retail bonds targeting 10tn, thus the government only needs to issue Rp8.3tn on average per month. The government proposed to increase net bond issuances slightly by Rp1.8tn to Rp106.3 as it proposed a wider budget deficit to 2.1% of GDP from 1.6% initially.
Outlook: is the rupiah sovereign yield curve will be more flattened? Rupiah government bond yield curve has flattened due to significant bond prices rally especially in long-end tenor in the last one month. The question is will the rupiah bond yield curve will be more flattening? We don’t think so, with four arguments:
1. Rupiah bond yield curve slope is more flat compared with regional peers. The slope between the 10-year local currency sovereign bond yield against the reference rate for Indonesia is 2.2ppt, meanwhile, for Thailand, P! hilippine s and Vietnam the slope is 2.3ppt, 3.96ppt and 4.56ppt respectively.
2. With the 10-year currently trading at 8.7% and long term average 10-year yield spread over inflation 4.3ppt, ceteris paribus, the market priced the bonds valuation at 4.4%. We think it’s overshooting, our rough calculation using historical inflation pattern - excluding increasing administered price such as electricity and fuel price, the inflation might come at 4.7% by 2010. But, with increasing electricity tariff plan on July! -10, we b elieve that the inflation might be higher than 4.7%. Our economist expect that inflation will be 5.5% YE10 revised down from 6.3% previous forecast.
3. The 10-year yield spread between the government’s rupiah bond and US Treasury notes currently is only 4.95ppt vs. 5.1ppt last week or long-term average of 7.3ppt. Although the minimum yield spread was 3.9ppt on 12-July-07, but our model suggests that the fair yield spread is still high i.e. 6.4ppt, assuming GDP growth 5.5% and rating of BB+ or CDS spread of 155ppt. The rupiah has also strengthened significantly to Rp9,008 agai! nst the U S dollar, close to our economist’s forecast of Rp8,900 for YE10, that’s we believe might reduce foreign fund inflows.
4. We believe that the government should do debt switching more frequently as the bond mature in 2011-2013 is still high. It has issued Rp18tn SPN series -T-bill year to date.
However, in real term (nominal yield minus core inflation), the rupiah sovereign yields are still attractive compared with regional peers i.e. 5.6% compared with 0.3%, 3.89% and 3.8% for Thailand, the Philippines and Vietnam respectively. The 10-year rupiah yield also still trading higher than foreign investor costs - Libor rate+CDS premium+rupiah curency swap (8.7% vs. 7.5%) as CDS has dropped significantly to only 154. But in terms of risk reward wise, we still maintain our strategy from barbell to bullet shortening duration (see: our strategy reports on 15-Mar for the detail).
Bond Auction Tuesday. The government will reopen the 1-year SPN20110407, 5-year FR27, 15-year FR40 and 18-year FR47 with total target of Rp5tn Tuesday. Currently, the FR27, FR40 and FR47 are trading at yields of 8.12%, 9.42% and 9.79% respectively. Our yield curve indicates that the fair yields are 8%, 9.44% and 9.68% respectively. We will update our yield auction prediction on Tuesday morning following the information on bonds’ closing prices Monday. If the demand is high, it will be positive for the bond market.
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