Handy Yunianto, head of fixed income research | Mandiri Sekuritas

In the first 23 days of 2019, JCI and rupiah gained by 4.42% and 1.29% ytd, or almost the same as in the same period last year, as both also reported gains of 4.4% and 1.8%, respectively. However, INDOGB’s performance was very different; the average government bond yield was stable at 8.2% (+8 bps ytd vs. -19bps in the same period last year). This brings the total returns of investing in INDOGB (including coupon) to -0.1% (vs. +1.6% in the same period in 2018)–according to BINDO Index.

What made the performance of INDOGB different compared to early last year? The answer in our view is a different foreign fund inflow pattern. In early 2018, foreign fund inflows to INDOGB reached Rp44tn, and only 32% was coming from the primary market. Meanwhile this year, foreign reported net inflow of only Rp9tn, – all is coming from the primary market, they actually reported net sell in the secondary market by Rp5.4tn. We suspect it was because of the front loading and gross issuance target this year that are higher than in 2018 by 6.7%, reaching Rp826tn. Note that, the Government has issued global bond prefunding this year of only USD3bn (vs. USD 4bn in 2018). In the last two conventional bond auctions, the Government issued almost at maximum target, on average by Rp28tn (vs. Rp25.5 tn in the same period last year).

In our calculation, assuming global bonds at 17% of gross issuances (Rp140.4tn), non-auction of around Rp82.6tn (coming from retail and private placement: 10% of gross issuances), sukuk issuances target at Rp8tn per auction (vs. Rp6.5tn average per auction in 2018), then the Government will need to issue on average Rp21.4tn on conventional bonds per auction this year (vs. almost Rp18tn realization per auction). Early 2019, the biggest buyer of government bond is from onshore banks totaling Rp34.9tn.

However, the interesting point is, if we look at foreign fund inflows by tenor, this year’s foreign inflows are mostly coming for longer tenors, unlike in 2018 when the inflows were mostly coming from very short end tenors – “hot money”. This might give us confidence that inflows could be more sustainable than in 2018. Note that in Feb 2018, foreign reduced their ownership significantly by more than Rp21tn.

Outlook: We put optimist view for Indonesia’s bond market in 2019, as we expect total returns to potentially be higher than in 2018. We believe the direction for yields will potentially lower following some positive catalyst factors: 1) Better bond yield entry level compared to early 2018. 2) Inflation might still be in line with BI’s range target of 2.5%-4.5%. 3) Prudent fiscal and monetary policies will positive for sovereign rating outlook. 4) High support from onshore investors

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