Daily Commentary (1-Mar): Government (Again) Issued Bonds Less than Initial Target; Deflation in February as Expected

Total incoming bids in Tuesday’s bond auction remained solid, reaching Rp61.5tn (vs. Rp76.8tn bids in the previous auction and Rp23tn initial target), despite rising geopolitics volatility. It was also in line with our incoming bid forecasts of Rp59tn-69tn. As we expected, escalating geopolitics in Ukraine and worries over hawkish Fed might have decelerated foreign investors’ participation during the auction, but ample rupiah liquidity might have supported demand. According to DMO data, foreign bids continued to decrease, at Rp4.4tn (vs. Rp8.5tn in the previous auction and Rp9tn average bid per auction YTD). Thus, the foreign-participation-bids-to-total-bids ratio also continued to decline to 7.1% (vs. 11% in the previous auction and 11.7% average per auction YTD).

The same with the previous auction, demand during Tuesday’s bond auction was still mostly from SPN series, totaling Rp32.3tn or 52.5% of total incoming bids, followed by demands for 10-yr FR0091 and 20-yr FR0092, reaching Rp15.3tn and Rp7tn, or 24.9% and 11.3% of total incoming bids, respectively. Although total incoming bids remained solid, the government finally issued only Rp19tn or lower than its initial target of Rp23tn, as we suspect there was high government excess cash. The government seems to have this flexibility due to 1) relatively high excess budget (SAL), estimated at >Rp333tn early this year; 2) lower deficit outlook due to tax reform (UU HPP) and surplus realization in January’s fiscal balance; and 3) oversubscription in ORI21 issuances that reached >Rp25tn.

The average awarded yields were broadly in line with our fair yield forecasts. Overall, the blended weighted government cost of fund lowered slightly to 5.87% (vs. 5.93% in the previous auction), but the weighted average tenor also lowered slightly to 11.6 years (vs. 11.8 years in the previous auction). Thus, YTD the government has already issued Rp184.1tn–gross or 14.2% of the full-year target, assuming a budget deficit at -4.85% of GDP (vs. 23.4% in the same period last year).

INDOGB yields remained stable after the bond auction, with foreign reporting net sell, at Rp4tn, all from non-benchmark series (-Rp4.5tn), while for benchmark series, foreign still reported net buy of Rp0.5tn, based on CTP PLTE data. According to Bloomberg, the 5-yr FR90 benchmark series traded at 98.97 (-0.06%) or yielded 5.36% (+1.4 bps), the 10-yr FR91 at 99.06 (+0.01%) or yielded 6.5% (-0.2 bps), the 15-yr FR93 at 98.86 (-0.15%) or yielded 6.49% (+1.6 bps), and the 20-yr FR92 at 102.41 (-0.05%) or yielded 6.9% (+0.4 bps). Meanwhile, regarding the 10-yr RoI USD global bond that will mature in Mar-2031, its price rebounded to 91.57 (+0.5%), yielding 2.92 (-6.1 bps), as the 10-yr US Treasury yield fell to <1.8% and the 5-yr CDS also lowered slightly to 112.19 (-3.7 bps).

The latest DMO bond flow data was as of 25-Feb (reflecting trading on 23-Feb), wherein foreign ownership in government bonds fell slightly to Rp896.63tn or 18.8% of the total outstanding (inflow of Rp9.3tn MTD or +Rp3.6tn YTD). YTD, the biggest net buyer of government bonds (incl. sukuk) is BI at Rp156.5tn (from SKB III burden-sharing at Rp156.5tn in Dec-2021, with settlement date on 3-Jan-2022), followed by insurance & pension fund at Rp48.4tn. Retail and other investors also reported net buys at Rp32.1tn (mostly coming from ORI-21 issuances) and Rp21.2tn, respectively. With PBS002 maturing, onshore banks became a net seller, at Rp11.2tn YTD, and mutual funds also reported net sell, at Rp8.2tn YTD.

The JCI rose 0.5% to another record close of 6,921.4 (+5.2% YTD), and foreign investors kept reporting net inflow, at Rp1.7tn (inflow of Rp25.3tn YTD). Asian equity indices closed mostly higher as the market navigated the changing situation in Russia and Ukraine, with the Nikkei and Hang Seng indices up, each by 1.2% and 0.2% to 26,844.7 (-6.8% YTD) and 22,761.7 (-2.7% YTD). The rupiah also appreciated by 0.2% to Rp14,337/USD (depreciated by 0.6% YTD) on Tuesday.

Two economic data were released on Tuesday: 1) The IHS Markit Indonesia Manufacturing PMI fell to 51.2 in Feb-2022 from 53.7 a month earlier. Both output and new orders eased as COVID-19 cases surged.  2) Indonesia’s Feb-2022 Consumer Price Index (CPI) decreased by 0.02% MoM (vs. +0.56% MoM in Jan-2022), the first fall in 5 months. The deflation was mostly driven by the decrease in the Food, Beverage & Tobacco expenditure group index (-0.84% MoM, contributing -0.22 ppt). Meanwhile, three expenditure group indices with the highest inflation contributions were 1) Housing, Water, Electricity, & Other Fuel due to non-subsidized LPG price increase (0.25% MoM, contributing 0.05 ppt); 2) Food & Beverage Provision/Restaurant (0.53% MoM, contributing 0.05 ppt); and 3) Personal Care & Other Services amid gold price increase related to the escalating geopolitical tension between Russia and Ukraine (0.60% MoM, contributing 0.04 ppt).  

Considering the first 2 months of the year, we see that inflation is at 0.54% YTD (vs. 0.36% YTD in 2M21). On an annual basis, headline inflation eased to 2.06% YoY in Feb-2022 (vs. 2.18% YoY in Jan-2022, the highest in the last 20 months). Meanwhile, core inflation, which excludes volatile prices and administered prices, strengthened to 2.03% YoY (vs. 1.84% YoY in Jan-2022).

(Source: Mandiri Sekuritas)