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Weekly Update
Danareksa Debt Research Weekly Report, 23 Jul 2019 : Dovish Direction
July 23, 2019 17:28

Dovish Direction

Safe havens remain attractive
Given the global economic uncertainty, demand for safe haven instruments such as US Treasuries has continued to increase. This has led to a downtrend in US Treasury yields. As of 15 July 2019, the 10-year US Treasury yield stood at 2.05%, or down by 64bps since the end of last year. At the same time, the difference between the US Treasury 10-year yield and the Fed Rate is negative 45bps.

Will the Fed reduce interest rates this July?
Currently, market players are still awaiting the Fed’s decision at the end of July 2019 on whether it will be in line with market expectations that the Fed will cut its benchmark interest rate given that Powell stated in his last statement that uncertainty was increasing. Based on Bloomberg calculations for the Fed Rate implied probability (ticker: WIRP) as of 22 July 2019, market participants expect that the Fed will reduce its benchmark interest rate by 25bps (74.5%), and possibly even by as much as 50bps (25.5%).

Bank Indonesia cut its benchmark interest rate
At the Bank Indonesia Board of Governors (RDG) meeting on 17-18 July 2019, the decision was made to reduce the 7-day BI Repo Rate (BI7DRRR) by 25bps from 6.00% to 5.75%. The decision was taken in consideration of the forecast for low inflation and the need to push economic growth momentum. Going forward, Bank Indonesia views that there is still room for accommodative monetary policy in line with the low inflation forecast and the need to push economic growth.

This decision was taken against a backdrop of persisting trade tensions which have slowed global economic growth, with Indonesia’s economic growth in the second quarter of 2019 estimated to be about the same as in the previous quarter. Meanwhile, the performance of Indonesia’s balance of payments in the second quarter was still maintained and a stronger rupiah exchange rate supported Indonesia’s external stability. In addition, inflation in June 2019 was maintained at a low and stable level, along with financial stability and sufficient liquidity as well as improved credit risk.

Strengthening of the Rupiah/US Dollar exchange rate
The Rupiah has strengthened relative to the US Dollar. As of 19 July 2019, the Rupiah/US Dollar exchange rate stood at IDR13,938 per USD or appreciating by 1.33% compared to the end of June 2019. Compared to the end of 2018, the Rupiah has appreciated by 4.32% from IDR14,568 per USD.

Attractive Indonesian bond yield
Meanwhile, the Indonesian bond market has shown good performance. Based on Bloomberg BTMM ID data as of 19 July 2019, 10-year Government bond yields stand at 7.15% or down 88bps compared to the end of 2018. IBPA notes that this downtrend in Indonesian bond yields pushed the total return on Government bonds to a solid figure of 10.36% from to the end of 2018.

Continuing the CDS downtrend
The bullish trend in Indonesian bond yields was also driven by an increase in Indonesia’s credit rating by S & P from BBB- to BBB at the end of May 2019. Compared to the end of May 2019, the level of risk as reflected in Indonesia’s 5-year CDS fell 30bps from 115bps to 85bps. The decline in Indonesia’s 5-year CDS is in line with the CDS average of countries that are ranked BBB.

Foreign ownership continues to increase
Foreign investors continued to be net buyers of Indonesian Government bonds. As of July 18, 2019 foreign ownership reached Rp1,011 trillion or 39.30% of the total. This nominal amount is higher by IDR118 trillion compared to the end of 2018, when the figure was IDR893 trillion.

Government bond issuances reached the target
The gross realization of Government bond issuances during the first semester reached IDR558.10 trillion, or 67.59% of the total requirement of gross issuances in 2019 of IDR825.7 trillion. This achievement exceeds the target in the first semester of 50% - 60%. The target of the Government auction in the second quarter was also achieved. With a target of IDR129 trillion, the realization of Government bonds and sukuk issuances in the second quarter was recorded at Rp132.96 trillion. During the third quarter, there were 7 bond auctions and 6 sukuk auctions with targeted issuances of IDR185 trillion. As of 22 July 2019, the Government conducted 2 SUN auctions and 1 SBSN auction with total funds raised amounting to IDR 52.2 trillion.

Government bond auctions
The government conducted its last auction on 16 July 2019 for the SUN series, including SPN03191017, SPN12200410, FR0077, FR0078, FR0080, FR0079, and FR0076. The total incoming bids were IDR53.14 trillion, while the total winning bids reached IDR22.05 trillion. The largest amount of bids were for series FR0078 with total incoming bids of IDR17 trillion, followed by FR0080 of IDR8.89 trillion. Meanwhile, the series with the most winning bids was FR0078 with IDR5.50 trillion, followed by FR0080 with IDR4.80 trillion. The next auction is on 23 July 2019 for the SPNS10012020, PBS014, PBS019, PBS021, PBS022, and PBS015 series.