Daily Commentary (24-Aug): Bond Market Responds Positively to SKB3 So Far

After the announcement of an extended burden-sharing between MoF and BI (SKB3), the INDOGB market rally pushed bond yields lower, and sukuk auction incoming bids remained solid on Tuesday. On the same day, the JCI closed lower, and the rupiah went up slightly against the USD. The JCI fell 0.3% to 6,089.5 (+0.3% MTD or +1.9% YTD), with foreign reporting a slight net outflow of Rp24.7bn (still net inflow of Rp2.4tn MTD or +Rp20.1tn YTD). Asian stock indices rose significantly for the second straight day, following strong gains in the US equity market overnight, as the Nikkei and Hang Seng indices rose, each by 0.9% and 2.5% to 27,732.1 (+1.1% YTD) and 25,727.9 (-5.5% YTD). The rupiah appreciated by 0.1% to Rp14,393/USD (appreciated by 0.5% MTD or depreciated by 2.4% YTD).

Total incoming bids in Tuesday’s sukuk bond auction remained solid at Rp52.5tn, also slightly higher than in the previous auction at Rp51.7tn (vs. average YTD bids of Rp33.6tn–excluding GSO). This was also higher than our bid range forecast of Rp32tn-42tn. Interestingly, longer tenor 12.6-yr PBS29 attracted the biggest demand during the auction at Rp14.2tn—also the highest demand so far this year. Short-end tenors also still attracted big demand, i.e., 6-mo SPNS and 2.9-yr PBS31, reaching Rp7.4tn and Rp14tn, respectively, or together, almost 41% of total bids. This may indicate that the types of investor bids during the auction might have varied, not only mostly coming from banks, but also institutional non-banks, such as pension fund and insurance companies.

Despite the relatively high incoming demand, the government issued only Rp9tn—lower than the initial target of Rp10tn. Overall, the average yield awarded was still in line with our fair yield forecast, and the blended weighted government cost of fund lowered to 5.58% (vs. 5.82% in the previous auction), but the weighted average tenor lowered to 8.7 years (vs. 12.73 years in the previous auction).

The total non-competitive awarded was at Rp2.7tn or 30% of total issuances (vs. 30.9% in the previous auction). This indicates that BI’s purchase in the auction might be slightly lower than in the previous auction. We will know how much BI bought by looking at the DMO bond fund flow data on 26-Aug (sukuk auction settlement date). In the previous sukuk auction on 10-Aug, BI bought Rp1.3tn or 12.2% of total issuances. YTD, BI’s bond purchase contribution (based on SKB-I) has reached Rp136.1tn (Rp92.8t7n in conventional bonds and Rp43.2tn in sukuk) or 20.7% of the total bond issuances in the primary market through auctions. YTD, the government has already issued Rp929.2tn gross or 74.2% of the new issuance target for this year.

INDOGB yields continued falling, with foreign reporting net buy of Rp1.8bn, mostly from benchmark series, i.e., +Rp1.3tn, according to the CTP PLTE on Tuesday. According to Bloomberg, the 5-yr FR86 benchmark series was trading at 101.62 (+0.23%) or yielded 5.1% (-5.6 bps), the 10-yr FR87 at 101.81 (+0.67%) or yielded 6.24% (-9.5 bps), the 15-yr FR88 at 99.38 (+0.13%) or yielded 6.31% (-1.3 bps), and the 20-yr FR83 at 104.79 (+0.23%) or yielded 7.03% (-2.2 bps). Regarding the 10-yr RoI USD global bond that will mature in Mar-2031, its price fell slightly to 97.31 (-0.03%), yielding 2.16% (+0.4 bps), and the 5-yr CDS fell slightly to 73.03 (-0.69 bps).

In the latest DMO bond flow data as of 23-Aug (reflecting trading on 19-Aug), foreign ownership in government bonds fell slightly by Rp0.85tn to Rp975.28tn (still net inflow of Rp9.5tn MTD or +Rp1.4tn YTD) or 22.4% of total outstanding. YTD, the biggest net buyer of government bonds (incl. sukuk) is onshore banks at Rp148.3tn, followed by BI at Rp123.5tn, insurance & pension fund at Rp91.7tn, retail investors at Rp68tn, and others at Rp76.8tn.

(Source: Mandiri Sekuritas)