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Weekly Update
Danareksa Debt Research Weekly Report, 25 Jun 2019 : Stronger Signal
June 25, 2019 16:51

Stronger Signal

The Fed remains dovish
The Fed kept its benchmark interest rate unchanged at the FOMC meeting held on 18-19 June 2019 in the range of 2.25% - 2.50%. However, Powell’s latest statement signals that the Fed may be receptive toward interest rate cuts in the future. At the press release of the FOMC meeting, the Fed said that because of heightened US economic uncertainty it would closely monitor developments in order to determine future policy direction. In addition, the Bloomberg calculation for the Fed Rate implies a 100% probability (ticker: WIRP) as of 24 June 2019 that the Fed rate would be cut in July. However, based on 20 years of historical data, the Fed has never made interest rate adjustments in July.

Strong demand for US treasuries
Nonetheless, demand for US treasuries has increased, pushing the 10-year yield down to 2.01% on 20 June 2019 (49bps lower than Fed rate). As of 21 June 2019, 10-year yield US treasuries noted 2.07% or dropped by 62bps from the end of 2018.

The Rupiah strengthened against the US Dollar
Last week, the Rupiah appreciated by 1.2% relative to the US Dollar to IDR14,155 per USD on 21 June 2019. As such, the Rupiah has appreciated by 2.8% relative to the US Dollar since the end of 2018. Last week, the US index trended lower to 96 points as of 21 June 2019.

Bank Indonesia and the current account deficit
The central banks of India (RBI), Australia (RBA) and Malaysia (BNM) have already lowered interest rates in response to the more dovish stance of the Fed. Bank Indonesia (BI) last week held a Board of Governors’ Meeting (RDG) and as expected, BI kept interest rates at the level of 6%. Looking ahead, BI anticipates a cut in US interest rates one time this year (by 25bps) and two times in 2020 (by 50bps).

In addition, BI also needs to take into consideration the CAD figure in the first quarter of 2019 when it increased to US$ 7 billion (2.6% of GDP), or up from US$5.19 billion in the first quarter of 2018 (2.01% of GDP). As of 24 June 2019, BPS reported a deficit of US$ 2.28 billion for April 2019. This figure is smaller than the figure released by the BPS on 15 May 2019 when it reported a figure of US$ 2.5 billion for April 2019. On the same date, BPS reported a trade surplus for May 2019 of US $210 million. Thus, Indonesia’s 5M19 trade balance recorded a deficit of US$ 2.14 billion, or better than in the same period in 2018 (a deficit of US$ 2.86 billion).

Bullish trend for the Indonesia Government bonds yield
Following an increase in Indonesia’s rating at the end of May 2019 by S&P, the 10-year Government Bond (10-year BTMM ID) yield fell to 7.45% on 21 June 2019 (source: Bloomberg), or down 50bps from the end of May 2019. Meanwhile, Indonesia’s 5-year CDS declined by 24bps to 92bps during the same period. This is in accordance with our previous report which indicates that there is a potential improvement in yields and CDS related to the increase in the rating by S&P at the end of last May.

Increase in foreign ownership
Meanwhile, foreign investors raised their ownership in Indonesian government bonds by IDR16.65 trillion from the end of May 2019 to IDR966.21 trillion (or 38.31% of the total outstanding) on 20 June 2019. Although this figure is still lower than at the end of the first quarter (IDR967.12 trillion), it is still IDR72.96 trillion higher than at the end of 2018.

Government bond auction
The government conducted its latest auction on 18 June 2019 for the SUN series, namely the SPN03190919, SPN12200619, FR0077, FR0078, FR0068, FR0079, and FR0076 series. At the auction, incoming bids reached IDR54.80 trillion or higher than at the previous SUN auction on 21 May 2019 (IDR26.2 trillion). The largest incoming bids were for the FR0077 series (IDR19.81 trillion), followed by the FR0078 series (IDR13.36 trillion). Meanwhile, the amount of winning bids was recorded at IDR24 trillion or higher than at the last SUN auction (IDR10.8 trillion). The largest amount of winning bids was for the FR0078 series (IDR7.90 trillion), followed by FR0077 (IDR5 trillion), FR0068 (IDR4.9 trillion), FR0079 (IDR2.6 trillion), SPN03190919 (IDR1.5 trillion), SPN12200619 (IDR1.1 trillion) and FR0076 (IDR1 trillion).

The auction target is almost met
In the second quarter up until 20 June 2019, the Government absorbed IDR122.80 trillion (including the GSO auction) from the total quarter II 2019 auction target of IDR129 trillion. In 2Q19, the Government will hold an auction again on 25 June 2019 for the SBN series SPNS01122019(re), PBS014(re), PBS019(re), PBS021(re), PBS022(re) and PBS015(re).