Taking the high road?
Review: high volatility. Volatility in the rupiah bond market increased during the week. After extending the rally in the first three days of the week, bond prices dropped significantly on Thursday before closing slightly higher at the end of the week. The 10-year government bond yield fell to a fresh low of 7.90% on Wednesday before rising to 8.1% on Thursday. Overall average government bond prices fell 0.59%, according to Mandiri Sekuritas Government Bond Index. Thus, total return investing in the government bonds is 16.6% year to date with average yield to maturity! up by 12 bps to 8.86%. The average return in the last 8 years was 15.6% p.a. In terms of USD, total return was higher to 21.4% as rupiah strengthened significantly this year.
Transaction volume was relatively high. Total value of the transaction in the secondary bond market was Rp5.9tn (vs. Rp5.5tn on the previous week) on average per day. The most actively traded security was the newly issued long-end series such as the 11-year FR53 and the 21-year FR54; both comprising about 16% of the total trading volume during the week. The FR53 was traded at 99.9, down by 1.9 percentage points yielding 8.22% from a week earlier. Meanwhile, the FR54 was down by 2.0 percentage points to 103.25, yielding 9.29%. Our fa ir prices for those bonds are 98.95 and 103.53, thus we think FR53 is traded above its face value, meanwhile the FR54 looks attractive.
What’s new?
The government plans to reduce T-bill (SPN) issuances. After announcing the plan to cut its remaining 2010 debt issue by Rp15tn (as budget deficit expected to narrow to 1.5% of GDP from earlier projection of 2.1%), director general of government debt management said Thursday that the government will reduce T-bill (SPN) issuance this year. We think there are two views on the plan, in my opinion: (1) The government is trying to reduce re! financing risk as there will be Rp65tn bonds maturing in 2011. Another action to mitigate refinancing risk is to use excess cash to buyback bonds, and switch bonds frequently. The Government bought back Rp168bn of bonds with a maturity date of Nov. 20, 2012 on Thursday (2) The government started to worry about strong foreign capital inflows. Demand for SPN from foreigners has been very strong after Bank Indonesia introduced mandatory 1-month holding period for its SBIs. Consequently, SPN attracted strong bids i.e. Rp7.5tn on average during auctions in the last three months. Due to the strong demand, yield of the SPN has also been below BI rate. In the last auction, the average yield awarded was 5.8% vs. BI rate of 6.5%. As the 1-year LIBOR is still low (i.e. 0.37%) and 1-year currency swap is 5.3% foreigners will still get positive result investing in SPN. The government’s plan to reduce SPN issuance might trigger yield curve to steepen as the short-term bond yield supply will be less while demand is still high. However, assuming that CDS 1 year (72.8bps) and currency swap rate are stable, the SPN yield of 5.8% will discourage arbitrage motive. Thus we think the downside yield for SPN is also limited, unless investors have naked position. Long term average of the yield of SPN 1 year vs. T-bill 1year is 7.99ppt! vs. curre ntly the spread is only 5.7ppt.
Bond auction result: total bid was still high. Total bid on the bond auction on Tuesday was still high reaching Rp17.2tn- higher than in the previous auction of Rp13.4tn. Demand for the short-term paper was still impressive with the bid for the SPN20110707 reaching Rp7.9tn or almost 46% of total bids. The average yields awarded for the SPN20110707, FR27, FR53 and FR54 were 5.84%, 7.42%, 7.96% and 8.94%, with the highest yields being 5.84%, 7.47%, 8% and 8.97% respectively. Thus, the government has issued Rp135.2tn (incl. global bonds issuances i.e. US$2bn) or almost 8! 3% of the new total target to finance budget deficit.
The Federal Reserve renewed its purchases of long end government debt. The U.S. Treasuries market rose after the Federal Reserve said it would renew its purchases of government debt, in a bold step to avert a double-dip recession. The Fed will deploy money from maturing agency bonds and mortgage-backed securities to buy long-dated Treasuries that are estimated to be between $10bn and $20bn a month from its mortgage assets to Treasuries. This action make the yield spre! ad betwee n two-year and 10-year tenors to shrink to 225 bps, the smallest margin since May 2009- long term average spread is 139bps. This also gives a spread between the 10 year rupiah bond against US Treasury note rose to 544bps. The average long term spread is 721bps, while historically when the spread is below 500bps, bond prices usually decreased
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