As scheduled, the government will hold a conventional bond auction on Tuesday with total target of Rp12tn or the same with previous auction. There are five bond series to be offered, including the bonds that attracted the most demand this year, i.e. 10-yr FR0056.
Another series to be offer are 3-mo and 6-mo SPN, 14.7-yr FR0073, and 19.7-yr FR0072. Compared to the previous auction on 16-Aug, yield curve is bearish steepened with the 2-yr bond yield having risen only by 14bps, while the 10-yr bond yield rose higher by 30bps. We think that bond yield rise on seasonal factors following Yellen’s Jackson Hole speech on Friday, which the market views strengthened Fed fund rate hikes this year.
Although demand from foreign might be slowing during the auction, we believe there will be support from onshore investors following lower inflation expectation in August will give room for Bank Indonesia to cut its benchmark rate on the next meeting in September, as also reflected on relatively strong demand on the last sukuk auction. We still expect that demand will remain solid on the range of Rp27-32tn. We estimate the fair yields will be 5.53% (range: 5.48-5.58%) for 3-mo SPN, 6.28% (range: 6.23-6.33%) for 12-mo SPN, 7.12% (range: 7.07-7.17%) for 10-yr FR0056, 7.41% (range: 7.36-7.46%) for 14.8-yr FR0073 and 7.48% (range: 7.43-7.53%) for 19.7-yr FR0072.
From Fed fund futures market data, the probability of FFR increase went up after Yellen’s speech compared to previous week on average by 17bps (Table 1). It triggered foreign investors to take profit as shown on IDR bond fund flows data as of 23-Aug, foreign reported net outflow by Rp7.1tn, sending the government bond yield rising by 17bps in 19-24 August. Interestingly, the buyers were not Bank Indonesia. With support from onshore investors such as banks, insurances, pension fund and mutual funds, Bank Indonesia is still not buying government bonds aggressively this year.
The government has issued Rp544tn ytd or almost 87% of the new government target, assuming budget deficit is 2.5% of GDP. Government bond issuances are potentially higher than target as budget deficit potentially widened more than 2.5% of GDP target and the government also plans to do pre funding this year targeting Rp50tn.
Handy Yunianto | email@example.com | Mandiri Sekuritas Research Team