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Global market uncertainties
On 21 March 2018, the Federal Reserve increased its benchmark rate by 25bps to 1.75%. In addition, the Fed also made adjustments to its macroeconomic assumptions. As such, the Fed now estimates GDP growth at the end of 2018 of 2.7% (compared to 2.5% in its forecast made in December 2017), while its forecast for the unemployment rate in December 2018 is 3.8% (compared to 3.9% previously). Meanwhile, inflation is still predicted to stand at 1.9% in December 2018.

According to the economic projection released by The Federal Reserve at the FOMC last week, the central tendency for Fed rate in 2018 was at the level of 2.1% - 2.4%. In other words, the reference rate could potentially increase 3 to 4 times in 2018 (including last week’s increase). However, some changes in the economic assumptions that tend to be more optimistic indicating the chances of Fed Rate may increase 4 times this year still relatively high. Following the announcement, the yield on the 10-year US Treasury curve fell from 2.89% on Wednesday (3/21) to 2.82% late last week (3/23).

President Donald Trump’s statement last Thursday on import tariffs on Chinese products created negative sentiment in the capital markets, especially the stock market. After the statement was released on 22 Mar 18, the Dow Jones stock index weakened 1.77% the next day. Asides from potential trade wars, another concerns of the market is that Trump’s statement could prompt China to sell-off US Treasuries. At the end of January 2018, China still held the largest amount of US Treasuries, i.e. around US$1.17 trillion, or about 19% of the total foreign holdings.

The Government yield increases
After the increase in Government bond prices in the previous week, prices began to fall again last week. This is reflected in the Danareksa Government bonds yield index which increased by 9bps last week. As such, after recording a positive return in the previous week, a negative weekly return was recorded last week. The weekly return was -0.54bps, while the YTD return was -0.70bps. Meanwhile, on 23 March 2018, the total amount of Government tradable securities reached IDR2,163 trillion or up by IDR17.34 trillion compared to the previous week. The amount of Foreign investor holding rose by IDR5.59 trillion, but the proportion fell by 0.05% to 38.98%

The Fed’s decision last week is predicted to pressure the US treasury volatility levels. On the other hand, the increasing trend of foreign ownership on IDR Tradable Government SBN during the last week is expected to continue. Although it will be limited, but market movements expected to improve during this week. Based on our yield curve valuation model, the IDR 10-year Government bond yield is estimated around 6.65% - 6.85% this week.

Investors still prefer short tenors to long tenors
The last auction of SBSN was held on 20 Mar 2018 for the following series: SPNS07092018, PBS016, PBS002, PBS017, PBS012, and PBS004. Total incoming bids at the last auction reached IDR13.06 trillion, or higher than at the previous SBSN auction on 6 March 2018 when total incoming bids reached IDR8.62 trillion. More specifically, the largest amount of incoming bids were for PBS016 (IDR4.98 trillion), followed by SPNS07092018 (IDR4.81 trillion). This indicates that investors still prefer short-tenors to long-tenors. From the total indicative target of IDR8 trillion, the total winning bids at the auction reached IDR8.9 trillion or higher than at the previous SBSN auction (IDR5.10 trillion). The most winning bids were for PBS016 (IDR4.63 trillion), followed by SPNS07092018 (IDR3 trillion). However, there were no winning bids for PBS012.

The auction will be held again on 27 Mar 2018 for the following series: SPN03180628, SPN12190314, FR0064, FR0065, and FR0075. The total indicative target for this auction is IDR17 trillion with a maximum target of IDR25.5 trillion.