The Government will hold the last rupiah government bond auction for 3Q this year today with an issuance target of Rp10tn (max Rp20tn) or the same amount with the previous auction. As scheduled, the Government will offer 3mo and 8mo SPN, 14.6-yr FR0065, 19.6-yr FR0075, and introduce the new 5.6-yr FR0077 and 10.6-yr FR0078 series to be auctioned – which potentially will be the new benchmark series for 5yr and 10yr tenors next year.

More private placement and retail bond issuances to offset lower issuances via auction in 3Q2018. The Government targeted to issue Rp181tn (excluding global bond, retail bond, and private placement) for 3Q18. Meanwhile, until the last sukuk auction last week, the Government has issued Rp138tn from auction only.

To mitigate lower issuance on auctions, the Government optimizes non-auction issuances by private placement and retail bond issuances. So far in 3Q2018, the Government has already issued Rp25tn from private placement and retail saving bonds (vs. Rp17.3tn in 2Q2018 and Rp11.9tn in 1Q2018). Overall, ytd the Government has issued Rp616.8tn-gross or 77.2% of its new gross issuance target for this year (below the realization at the same period last year that already reached 82.4%).

Assuming non-auction issuances portion is 10% of gross issuances, sukuk issuance per auction is Rp6tn, and no more global bond issuances for the rest of this year, then the Government on average needs to issue Rp16tn per auction for conventional bonds. If the Government increases global bond issuance portion to 20% of gross issuances, then the average conventional bond auction will lower to Rp13.1tn.

Total bids lowered in the previous bond auction due to less foreign participation. Total bids lowered in the last conventional bond auction on 12-Sept, reaching Rp36.8tn (vs. Rp59.3tn in previous auction and Rp40.7tn average total bids per auction ytd). According to DMO data, foreign bids were decreasing significantly to Rp6.6tn (vs. Rp17tn in the previous conventional auction and Rp8.6tn average foreign total bids ytd).

Onshore banks were reported as the biggest net buyers of bonds ytd. According to DMO data based on settlement date as of 21-Sept, onshore banks were reported as the biggest net buyers of rupiah government bonds (including sukuk), reported at +Rp52.7tn ytd, followed by insurance companies and Bank Indonesia at +Rp40.6tn and +Rp37.4tn, respectively. Meanwhile, foreign selling pressure was easing in-line with lowering USD index. Foreigners were reported back as net buyers as much as Rp4.4tn ytd.

We expect demand to rebound and be higher than in the previous conventional auction, ranging Rp37tn-42tn. Three positive catalysts to support today’s auction demand: 1) Liquidity projection in the banking system is still ample, reported at Rp103.8tn as of 24-Sept. (2) Foreign sell-off has eased, following lowering DXY index trend. (3) Introduction of new FR bond series – i.e. 5-yr FR0077 and 10-yr FR0078 that will become the new benchmark series for next year – might attract more demand.

The rupiah bond yield curve is bullish flattened. Compared to the previous conventional bond auction on 12-Sept, the rupiah bond yield curve is bullish flattened, as the 2yr bond yield decreased by 4 bps to 7.78%, while the 10yr bond yield decreased more by 41 bps to 8.20%. We estimate the fair yields for today conventional auction will be 5.68% (range: 5.63-5.73%) for 3mo-SPN, 6.36% (range: 6.31- 6.41%) for 8mo SPN, 8.13% (range: 8.08-8.18%) for 5.6-yr FR0077, 8.23% (range: 8.18-8.28%) for 10.6-yr FR0078, 8.43% (range: 8.38-8.48%) for 14.6-yr FR0065, and 8.67% (range: 8.62-8.72%) for 19.6-yr FR0075. (Source: Manrdiri Sekuritas)


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