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Danareksa Debt Research Weekly Report,06 August 2019:Fed Rate Cut and Heightened Trade War Tensions
August 06, 2019 17:22

Fed Rate Cut and Heightened Trade War Tensions

The Fed cuts interest rates
On 31 July 2019 the Central Bank of the United States Federal Reserve cut its benchmark interest rate by 25bps to the range of 2.00% -2.25%. The cut is the first since 2008 and took into account several factors including inflation developments in the US and concerns over the state of the global economy. The Federal Reserve also hinted that it would cut rates further if necessary. Nonetheless, US President Donald Trump said that the decision to reduce interest rates was not aggressive enough. Meanwhile, according to Bloomberg implied probability of the Fed Funds rate, the Fed Funds rate was expected to be cut further in the upcoming Fed meeting. More than 75% of those questioned said that the Fed rate would be cut again on 18 September 2019 by 25 bps to 1.75% -2.00%.

Heightened trade war tensions
Following the Fed’s rate cut and President Trump’s statement, trade war tensions heightened toward the end of last week. On 1 August, 2019, President Trump said he planned to impose a new tariff of 10% on products imported from China worth US$300 billion. The tariffs would take effect on 1 September. Previously, as much as US$250 billion of products made in China were subject to an import fee of 25%. President Trump said China did not move fast enough to resolve the trade war, and he warned that he might raise tariffs on Chinese goods by more than 25% if trade negotiations with Beijing continued to stall. The benchmark 10-year US Treasury yield dropped to its lowest level since 2016 on Thursday after President Donald Trump announced new tariffs on Chinese goods. The benchmark 10-year US Treasury yield fell significantly by 15bps to 1.878%, its lowest level since November 2016. As of 2 August 2019, the 10-year US Treasury yield stood at 1.86%.

“Currency Manipulator” accusations
On Monday, 5 August 2019 relations between the US and China continued to deteriorate. The US government accused China of being a “Currency Manipulator” shortly after the Chinese Central Bank allowed its currency to fall below 7 yuan against the US Dollar. The Chinese government’s strategy is seen as a countermeasure against the threat coming from President Trump’s policies as he will impose a 10% tariff on US$ 300 billion of imported goods from China. This caused the benchmark 10-year US Treasury yield to fall further by 11bps to 1.75%.

Impact on the Indonesian bond market
Indonesian bond yields closed at 7.57% on 2 August 2019, an increase of 5bps compared to the level on 1 August 2019 and an increase of 35bps compared to the previous week’s level on 26 July 2019. Meanwhile, the Rupiah/USD exchange rate weakened by 1.3% to IDR14,185 per USD from IDR14,009 per USD on 26 July 2019.

Indonesia’s CDS has increased again
The level of risk as reflected in Indonesia’s 5-year CDS increased by 11bps from 78 bps on 26 July 2019 to 89bps on 2 August 2019. The increase in Indonesia’s 5-year CDS was also influenced by global uncertainty. This can be seen in the increase of Indonesia’s 5-year CDS by 7bps on 2 August 2019 following President Trump’s statement on tariffs that would be imposed on imported goods from China.

Foreign ownership continues to increase
Foreign investors continued to be net buyers of Indonesian Government bonds. As of 2 August 2019 foreign ownership reached IDR1,019 trillion, an increase of IDR5.98 trillion compared to the previous week’s close. However, the proportion of foreign ownership is only slightly up from 39.27% to 39.33% of the total. In nominal terms, the amount is IDR126 trillion higher than at the end of 2018, when foreign ownership stood at IDR893 trillion.

Realization of Government bond auctions
As of 31 July 2019, from the total amount of required net Government securities issuances in 2019 of IDR388.96 trillion, some Rp264.44 trillion or 67.99% had been realized. And for the total IDR825.70 trillion of gross issuances required in 2019, the Government has issued IDR620.82 trillion or 75.19% of the target. In total, IDR433.54 trillion (69.83%) were conventional securities while IDR187.28 trillion (30.17%) were sukuk.

The Government held its last auction on 30 July 2019 for the SUN series, including SPN03191031, SPN12200410, FR0081, FR0082, FR0080, FR0079, and FR0076. Two new series were auctioned, namely the FR0081 series with a coupon rate of 6.50% which will mature on 15 June 2025 and FR0082 with a coupon rate of 7.00% which will mature on 15 September 2030.

The total incoming bids amounted to IDR43.27 trillion, lower than at the previous SUN auction when total incoming bids reached IDR53.14 trillion. Meanwhile, the total amount of winning bids was IDR21.45 trillion, or lower than at the previous SUN auction of IDR22.05 trillion. The series with the largest amount of incoming bids was the FR0082 series with total incoming bids of IDR19.66 trillion, followed by FR0081 with IDR10.39 trillion. Meanwhile, the most winning bids were for the FR0082 series (IDR11.60 trillion), followed by the FR0081 series (IDR3.54 trillion). Looking ahead, the Government will conduct another auction on 6 August 2019 for the series SPNS07022020, PBS014, PBS019, PBS021, PBS022, and PBS015.