Bond Market Update 23-27 Debt January Research 2017 23-27 January 2017 Handy Yunianto handy.yunianto@mandirisek.co.id (6221) 5296 9568 Yudistira Yudadisastra yudistira@mandirisek.co.id (6221) 5296 9696 First Weekly Losses This Year Country 10 year bond yields Weekly yield (bps) YTD yield (bps) Currency Weekly currency YTD currency Inflation YoY% 27-Jan-17 20-Dec-16 27-Jan-17 20-Dec-16 31-Jan-17 Thailand 2.70 2.67 3.7 5.6 35.3 35.4-0.4-1.4 1.1 Philippine 4.06 4.06 0.0 0.0 49.9 49.9-0.1 0.2 2.6 India 6.40 6.47-6.3-11.3 68 68-0.2 0.2 3.4 Indonesia 7.62 7.57 4.8-35.2 13,359 13,410-0.4 (0.8) 3.0 Review: Weekly Losses Were Driven by Global Rate-Sell Off After reporting gains for three weeks straight by 1.5%, in the fourth week the average rupiah government bond prices fell slightly by 0.2%, sending the average government bond yield rising slightly by 3bps to 7.88%, according to our Mandiri Sekuritas Government Bond Index (MSGBI). Overall during the week, the rupiah bond yields are mixed with shorter tenors falling on average by 1bps, while longer tenors rising by 4bps, thus the yield curve bearish steepened. The selling momentum was driven by global rate sell-off as the 10-yr UST yield has been volatile, ranging 2.4-2.51% during the week. Not only Indonesia's, on average Asian local currency government bond returns also weakened to -0.05%. In the terms of USD, the Indonesian rupiah government bonds outperformed compared to other Asian local currency government bonds YTD by 164bps. The highest gain for government bond performance was Taiwan's, which reported 3.6%, mostly coming from Taiwan currency that appreciated against USD by almost 3% ytd (Figure 1). FIGURE 1. TAIWAN LOCAL CURRENCY IS THE BEST GAINER YTD, IN USD TERMS BBG Taiwan Local Sov BBG S Korea Local Sov BBG Indonesia Local Sov BBG Malaysia Local Sov FIGURE 2. NEGATIVE RETURN IN THE FOURTH WEEK OF THIS YEAR 5.0% 9.0% 4.0% 8.5% 3.0% 8.0% 2.0% 7.5% 1.0% BBG Philippine Local Sov BBG Thailand Local Sov BBG China Local Sov BBG India Local Sov BBG ASIA Local Sov Source: Bloomberg as of 27-Jan FX gained/(loss) against USD Total return LCGB -0.01 0 0.01 0.02 0.03 0.04 0.05 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% Total Return Avg. Yield Index (RHS) Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 1st Week 2nd Week 3rd Week 4th Week Source: Mandiri Sekuritas Estimate 7.0% 6.5% 6.0% 5.5% 5.0% Page 1
Sukuk Auction Result: Continued Positive Trend Result As expected, total bids coming to the first bond auction remained solid, even higher than the average of the first bond auctions in the last three year, i.e. Rp36.9tn vs. Rp23.9tn and Rp15tn initial target - even though most demand was coming from SPN3mo, totaling almost Rp15tn or more than 40% of total bids coming. The government issued Rp6tn, with average/highest yields awarded at 5.93/6.0% for 3mo SPN. This is in line with the government's aim to increase SPN3mo issuance to Rp5tn (vs. only Rp1.6tn avg. issuance per auction in 2016). While for 1yr SPN, the government issued Rp5.3tn (vs. total bids of Rp7.3tn) with average/highest yields awarded at 6.79/6.85%. The government only awarded 10yr-FR59 totaling Rp3.6tn (vs. total bids of Rp5.2tn) with average/highest yields awarded at 7.8/7.86%. The government rejected all bids for 5yr-FR61 and 20-yr FR72. This pushed bond prices to increase in the secondary market. Thus on the first bond auction this year, the government has successfully issued Rp15tn, exactly the same with its initial target. As expected, total bids coming to sukuk auction remained solid, even though slightly lower than in the previous sukuk auction, but higher than average total bids of sukuk in 2016, totaling Rp23.7tn (vs. Rp24tn previous sukuk auction, and Rp11.5tn average total bids in 2016). The demand was mostly coming from 6mo SPN-S, totaling Rp14.5tn (the highest total bids for SPN-S 6mo since 2014) or more than 60% of total bids coming. We estimate that Banks and Bank Indonesia are behind this solid demand, as known, the liquidity is still ample as OMO outstanding in Bank Indonesia increased while JIBOR rate declined slightly (See: our previous report: Will Sukuk Auction Break New Record Bids?). We can see who is the buyer based on bond fund flow data by DMO settlement date on 26-Jan-2017. On the first sukuk auction, onshore banks were the biggest net buyer, reported at Rp3.5tn or more than 50% of total net issuances, followed by Bank Indonesia totaling Rp1tn. TABLE 1. SUKUK AUCTION RESULT VS. OUR FAIR YIELD FORECAST 6-mo SPN-S 2.3-yr PBS13 4.3-yr PBS14 6.6-yr PBS11 14.8-yr PBS12 Total bids (Rp tn) 14,503 6,847 1,229 644 503 Total awarded (Rp tn) 2,000 3,000 850 230 225 Minimum bid yield 5.15625 6.875 7.15625 7.78125 8.1875 Average yield awarded 5.32831 7.05057 7.44966 7.79917 8.24931 Highest yield awarded 5.46875 7.09375 7.53125 7.84375 8.28125 Our fair yield forecast 5.344-5.438 7.0-7.094 7.469-7.563 7.813-7.906 8.125-8.219 Thus, the government has issued Rp94.7tn gross issuances so far this year (including pre funding issuances in Dec-2016) or 13.8% of target issuance this year assuming budget deficit is 2.4% of GDP. According to the latest DMO data with settlement date as of 23-Jan, mtd foreign investors are (still) the biggest investor in Indonesian government bonds (both in conventional bond and sukuk), reported at Rp17.3tn (vs. Rp107.3tn foreign fund inflow in 2016), followed by Banks and Bank Indonesia that reached Rp7.3tn and Rp5.4tn respectively. FIGURE 3. MTD, FOREIGN INVESTORS ARE (STILL) THE BIGGEST NET BUYER IN INDONESIAN BOND MARKET Type Investors Outstanding as of 23-Jan Net Buy (Sell) MTD SUN SBSN Total SUN SBSN Total Bank 263.7 119.4 383.1 7.0 0.3 7.3 Central Bank Mutual Fund 157.7 5.5 163.2 4.4 1.0 5.4 74.7 12.7 87.5 1.2 0.6 1.8 Insurance 189.4 50.5 239.9 1.2 0.5 1.7 Foreign 671.0 12.1 683.1 14.0 3.2 17.3 Pension Fund 72.7 14.1 86.8 (0.5) (0.0) (0.5) Retail 38.7 19.0 57.7 0.0 (0.1) (0.0) Others 86.9 17.9 104.7 0.0 (0.1) (0.1) TABLE 2. THE GOVERNMENT HAS ISSUED RP94.7TN OR 13.8% OF GROSS TARGET ISSUANCE THIS YEAR Budget Government budget financing 2017 (Rp tn) (Baseline) 2017 Budget deficit % of GDP 2.4 Budget deficit (Rp tn) 330.2 Redemption, Cash Management & Buyback 284.8 Government bond nett issuances 400.0 Government bond gross issuances 684.8 Realized issuance as of 17-Jan-2017 94.7 Domestic bonds Auction Conventional FR/VR dan T-bills/ZC 35.4 Retail bonds (ORI & Sukuk) Domestic sukuk 12.9 Private placement Page 2
Total 1,555 251.1 1,806. 27.4 5.4 32.8 Global bonds 46.5 Source: DMO as of 24-Jan-2017 Lower trading volume and foreigners reported net buy Trading volume lowered slightly in the fourth week of this year, reported at Rp9.2tn average transaction per day (lower than the previous week, i.e. Rp10.1tn). According to the latest DMO data with settlement date as of 30-Jan, foreign investors are (still) the biggest buyer of government bonds, mtd foreign investors posted net buy totaling Rp20.6tn, thus total ownership for foreign investors in the government bond market has reached Rp686.4tn or 37.9% of total outstanding. TABLE 3. TOP 10 HIGHEST TRADING VOLUME OF GOVERNMENT BONDS No Series Maturity Date Coupon Total Volume (Rp bn) Total Freq (x) Price YTM 1 FR0059 15-May-27 7.00 6,928 583 98.00 7.28 2 FR0072 15-May-36 8.25 5,963 384 100.00 8.25 3 FR0061 15-May-22 7.00 5,464 193 98.90 7.25 4 FR0053 15-Jul-21 8.25 3,804 205 103.56 7.30 5 FR0070 15-Mar-24 8.38 3,482 153 103.75 7.68 6 FR0068 15-Mar-34 8.38 2,479 207 102.75 8.07 7 FR0056 15-Sep-26 8.38 1,875 79 105.01 7.63 8 FR0071 15-Mar-29 9.00 1,565 69 107.00 8.08 9 PBS009 25-Jan-18 7.75 1,396 30 101.75 5.91 10 FR0069 15-Apr-19 7.88 1,253 45 101.85 6.95 Source: IDX and Mandiri Sekuritas TABLE 4. BOND FLOW DATA: FOREIGN (STILL) THE BIGGEST BUYER OF GOVERNMENT BONDS FOLLOWED BY COMMERCIAL BANKS AND BANK INDONESIA MOSTLY COMING FROM PRIMARY MARKET Type Investors Outstanding as of 30-Jan Net Buy (Sell) MTD 2016 SUN SBSN Total SUN SBSN Total SUN SBSN Total Bank 261.1 122.3 383.4 4.3 3.3 7.6 (7.1) 34.0 26.9 Central Bank 157.7 5.9 163.6 4.4 1.4 5.8 5.7 2.1 7.8 Mutual Fund 74.8 13.0 87.8 1.3 0.8 2.1 16.9 7.1 24.1 Insurance 189.9 50.7 240.6 1.6 0.8 2.4 46.3 20.3 66.6 Foreign 672.9 13.5 686.4 15.9 4.6 20.6 106.6 0.7 107.3 Pension Fund 72.8 14.0 86.8 (0.4) (0.0) (0.5) 28.6 8.8 37.4 Retail 38.7 18.9 57.7 0.0 (0.1) (0.1) 7.7 7.5 15.2 Others 87.0 17.8 104.8 0.2 (0.2) 0.0 20.2 5.8 26.1 Total 1,554.9 256.2 1,811.1 27.4 10.5 37.9 225.0 86.5 311.4 Source: DMO Outlook: Bond auction, January inflation, and FOMC meeting will be the events observed by investors The market will watch January CPI number and FOMC meeting on 1-Feb; (1) BI projected that January inflation is 0.69%mom or 3.2%yoy (vs. 3% in 2016); if the result is higher than BI s projection it will give negative sentiment to the bond market; and (2) FOMC meeting; the market still expects FFR will be stable at 0.75% with a probability of 86%. If the Fed is signaling to be more hawkish, then it might affect the rupiah bond market negatively. The government will also hold a conventional bond auction on Tuesday, targeting Rp15tn (Maximum Rp22.5tn), offering 3-mo and 1-yr SPN, 5-yr FR61, 10-yr FR59, and 15-yr FR74. Page 3
Bond auction on Tuesday: Will Bids Break New Record? As scheduled, the government will hold a bond auction on Tuesday, targeting to issue Rp15tn (Maximum Rp22.5tn) and offering 3mo and 1-yr SPN series, 5.3-yr FR61, 10.3-yr FR59, and 15.5-yr FR74. With still ample liquidity (indicated by low JIBOR rate and relatively high BI outstanding OMO) and the reopened 10-yr FR59 series - that historically attracted the most demand - thus we believe total bids might still be solid during the auction. On the last auction on 17-Jan, total bids broke a new record high at Rp53.7tn, while the government successfully issued Rp20.4tn (vs. Rp15tn initial target). Onshore banks were the biggest net buyer on the primary government bond, but, if including transactions in secondary market, then foreign investors were the biggest net buyer, totaling Rp20.3tn ytd or almost 54% of total government bond net issuances. FIGURE 4. LOW JIBOR RATE AND HIGH BI OUTSTANDING OMO INDICATE RUPIAH LIQUIDITY STILL AMPLE 9.00 8.00 7.00 6.00 5.00 4.00 OMO Outstanding JIBOR ON Rate JIBOR 1month 3.00 30-Sep 31-Oct 30-Nov 31-Dec 500,000 450,000 400,000 350,000 300,000 250,000 200,000 FIGURE 5. OUTSTANDING SBI CONTINUED TO BE LOWER, THIS MIGHT ATTRACT DEMAND FOR SPN SERIES 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 SBI (Net) 1-Jan-16 1-Feb-16 1-Mar-16 1-Apr-16 1-May-16 1-Jun-16 1-Jul-16 1-Aug-16 1-Sep-16 1-Oct-16 1-Nov-16 1-Dec-16 1-Jan-17 Source: Bloomberg Source: Bloomberg The rupiah bond yield curve bearish steepened with the 2-yr bond rising only 3bps to 7.03%, while the 10-yr bond yield rose higher by 10bps to 7.62% compared to previous auction on 17-Jan. We estimate the fair yields for the government bond auction today will be 5.05% (range: 5.0-5.094%) for 3-mo SPN, 5.95% (range: 5.906-6.0%) for 1-yr SPN, 7.23% (range: 7.188-7.281%) for 5.3-yr FR61, 7.61% (range: 7.563-7.656%) for 10.3-yr FR59, and 7.98% (range: 7.938-8.031%) for 15.5-yr FR74. FIGURE 6. RUPIAH YIELD CURVE BEARISH STEEPENED COMPARED WITH PREVIOUS BOND AUCTION ON 17-JAN 9.00 8.50 FIGURE 7. FOREIGNERS WERE THE BIGGEST NET BUYER GOVERNMENT BONDS YTD (RP20.3TN OR TOTAL 54% OF TOTAL NET ISSUANCES) Pension Fund Retail 8.00 7.50 7.00 6.50 6.00 17-Jan-17 30-Jan-17-5 10 15 20 25 30 Others Insurances Mutual Fund Bank Indonesia Bank Foreign (5.00) - 5.00 10.00 15.00 20.00 25.00 Source: Bloomberg Page 4
TABLE 5. THE GOVERNMETN HAS ISSUED RP94.7TN GROSS OR 13.8% OF TARGET ISSUANCE THIS YEAR Budget Government budget financing 2017 (Rp tn) (Baseline) 2017 Budget deficit % of GDP 2.4 Budget deficit (Rp tn) 330.2 Redemption, Cash Management & Buyback 284.8 Government bond nett issuances 400.0 Government bond gross issuances 684.8 Realized issuance as of 24-Jan-2017 94.73 Domestic bonds Auction Conventional FR/VR dan T-bills/ZC 35.4 Retail bonds (ORI & Sukuk) Domestic sukuk 12.9 Private placement Global bonds 46.5 TABLE 6. BANKS BECAME THE BIGGEST NET BUYER ON THE PRIMARY CONVENTIONAL GOVERNMTN BOND MARKET Auction Date 3-Jan 17-Jan Total Bank 10.9 12.0 22.9 Bank Indonesia 3.0 3.0 6.0 Mutual Fund 0.1 0.3 0.4 Insurances 0.1 1.2 1.3 Foreign 0.8 3.4 4.2 Pension Fund (0.0) 0.1 0.0 Retail 0.0 (0.0) (0.0) Others 0.0 0.4 0.4 Total 15.0 20.3 35.4 Page 5
APPENDIX 1. THE YIELD CURVE Source: Bloomberg as of 27 January 2017 APPENDIX 2. TRADING WISE: SELL FR28, FR59 AND FR56 AND BUY: FR60, FR36 AND FR34 Series Maturity Date Coupon Price YTM Yield Curve Spread to YC Recommend ation Price Model FR0028 15-Jul-17 10.00% 102.03 5.38% 5.90% -51.6 DEAR 101.81-22.0 FR0059 15-May-27 7.00% 95.89 7.58% 7.93% -34.6 DEAR 93.55-233.9 FR0056 15-Sep-26 8.38% 105.03 7.63% 7.85% -22.6 DEAR 103.48-155.4 FR0072 15-May-36 8.25% 101.08 8.14% 8.30% -16.2 DEAR 99.52-155.6 FR0065 15-May-33 6.63% 86.81 8.10% 8.25% -15.6 DEAR 85.55-125.6 FR0039 15-Aug-23 11.75% 120.82 7.64% 7.51% 13.6 CHEAP 121.60 78.1 FR0067 15-Feb-44 8.75% 102.44 8.52% 8.38% 13.7 CHEAP 103.92 148.2 FR0034 15-Jun-21 12.80% 120.08 7.34% 7.20% 13.9 CHEAP 120.65 57.5 FR0036 15-Sep-19 11.50% 110.47 7.05% 6.88% 16.7 CHEAP 110.89 42.2 FR0060 15-Apr-17 6.25% 100.11 5.55% 4.94% 61.8 CHEAP 100.25 14.4 Source: Mandiri Sekuritas Estimate +/-bps Page 6
Mandiri Sekuritas A subsidiary of PT Bank Mandiri (Persero) Tbk Plaza Mandiri 28 th Floor, Jl. Jend. Gatot Subroto Kav. 36-38, Jakarta 12190, Indonesia General: +62 21 526 3445, Fax : +62 21 527 5701 (Debt Sales) DEBT RESEARCH TEAM Handy Yunianto Leo Putra Rinaldi Head of Fixed Income Research Chief Economist handy.yunianto@mandirisek.co.id leo.rinaldy@mandirisek.co.id +62 21 5296 9568 +62 21 5296 9406 Ali Hasanudin Wisnu Trihatmojo Credit Analyst Economist ali.hasanudin@mandirisek.co.id wisnu.trihatmojo@mandirisek.co.id +6221 5296 9629 +62 21 5296 9544 Yulia Ansari Aziza Nabila Amani Credit Analyst Research Assistant yulia.ansari@mandirisek.co.id aziza.amani@mandirisek.co.id +62 21 5296 9408 +6221 5296 9688 Yudistira Yudadisastra Credit Analyst yudistira@mandirisek.co.id +62 21 5296 9698 DEBT CAPITAL MARKET TEAM Abdul Hadie Head of Institutional Sales abdul.hadie@mandirisek.co.id +62 21 527 5378 Sita Arvianti Fonny Supargo Institutional Sales Institutional Sales sita.arvianti@mandirisek.co.id fonny.supargo@mandirisek.co.id +62 21 527 5378 +62 21 527 5378 Teguh Suwarno Deswita Nia Nur Mohammad Haikal Institutional Sales Institutional Sales Institutional Sales teguh.suwarno@mandirisek.co.id deswita.nur @mandirisek.co.id mohammad.haikal@mandirisek.co.id +62 21 527 5378 +62 21 527 5378 +62 21 527 5378 SINGAPORE DEBT CAPITAL MARKET TEAM Kenneth Toh Miranti Wulansari Head of Fixed Income Sales & Trading AVP - Institutional Sales kenneth.toh@mandirisecurities.com.sg miranti.wulansari@mandirisecurities.com.sg +65 6589 3898 +65 6589 3899 Mandiri Sekuritas A subsidiary of PT Bank Mandiri (Persero) Tbk Plaza Mandiri, 28 th Floor Jl. Jend. Gatot Subroto Kav. 36-38 Jakarta 12190 - Indonesia General: +62 21 526 3445 +62 21 527 5701 (Debt Capital Market) DISCLAIMER: This report is issued by PT. Mandiri Sekuritas, a member of the Indonesia Stock Ex (IDX) ) and Mandiri Sekuritas is registered and supervised by the Financial Services Authority (OJK). Although the contents of this document may represent the opinion of PT. Mandiri Sekuritas, deriving its judgement from materials and sources believed to be reliable, PT. Mandiri Sekuritas or any other company in the Mandiri Group cannot guarantee its accuracy and completeness. PT. Mandiri Sekuritas or any other company in the Mandiri Group may be involved in transactions contrary to any opinion herein to make markets, or have positions in the securities recommended herein. PT. Mandiri Sekuritas or any other company in the Mandiri Group may seek or will seek investment banking or other business relationships with the companies in this report. For further information please contact our number 62-21-5263445. ANALYSTS CERTIFICATION: Each contributor to this report hereby certifies that all the views expressed accurately reflect his or her views about the companies, securities and all pertinent variables. It is also certified that the views and recommendations contained in this report are not and will not be influenced by any part or all of his or her compensation.