The government will conduct another regular sukuk auction on 2-Sep, targeting Rp9tn (unchanged from the previous auction). The offer includes two SPNS series (6-mo reopening, 9-mo new issuance) and five PBS reopening: PBS003 (1.4-yr), PBS030 (2.9-yr), PBSG001 (4-yr), PBS034 (13.8-yr), and PBS038 (24.3-yr). We expect the incoming bids to moderate to ca. Rp27tn (range: Rp22tn 32tn), below the Rp33.1tn in the previous auction, as political unrest may temporarily dampen demand.
Demand eased but remained solid. The total incoming bids moderated to Rp33.1tn in the 19-Aug sukuk auction, down from Rp43tn in the 5-Aug auction, though still above the YTD average of Rp31.4tn per auction. By series, the 2.9-yr PBS030 drew the strongest interest, collecting Rp10.2tn (30.9% of total), which was higher than both the previous auction s figure (Rp8.5tn) and its YTD average (Rp8.1tn). Other notable demand came from the 24.3-yr PBS038 with Rp6.1tn (18.4%) and the 9-mo SPNS with Rp5.3tn (16.1%).
Issued at the same amount as the initial target. Despite the relatively solid demand, the government issued only Rp9tn, in line with the initial target but lower than the Rp12tn raised in the previous auction. As a result, the weighted average cost of funds eased to 6.18% (vs. 6.30% prior), while the average tenor lengthened to 10 years (from 9.36 years). YTD, the gross bond issuance has reached Rp933.5tn, or 68% of our full-year target, based on a -2.78% of GDP deficit assumption.
Based on our calculation, onshore banks maintained their dominance in the primary sukuk market during the 19-Aug auction, securing Rp4.2tn in net awards, or 46.8% of the total issuance. Following behind, insurance and pension funds posted Rp3.2tn in net awards, other investors posted Rp0.8tn, Bank Indonesia posted Rp0.5tn, mutual funds posted Rp0.15tn, and retail investors posted Rp0.12tn. Including secondary market activity, onshore banks have remained the largest type of net sukuk buyers YTD, with a cumulative net buy of Rp34.1tn, followed by retail investors with Rp13.6tn, other investors with Rp7.9tn, Bank Indonesia with Rp7.6tn, foreign investors with Rp6.8tn, and mutual funds with Rp3.8tn. Meanwhile, only insurance & pension funds reported a net sell, amounting to -Rp22.1tn, partly due to maturing sukuk series that have not yet been reinvested in INDOGB.
Balancing liquidity and politics. Despite political noise due to widespread demonstrations in a few regions in Indonesia, several factors should support bids: (1) The liquidity projection by Bank Indonesia is flush at Rp161.8tn (vs. 170.1tn in the previous sukuk auction). (2) There will be maturing bonds this week, totaling Rp10.7tn (mostly from SPNS series, amounting to Rp8.2tn), plus coupon payment amounting to Rp1.6tn. (3) The potentially increasing demand might come from the reinvestment of the maturing PBS036 in the last 2 weeks, which was mostly owned by insurance & pension funds and onshore banks, estimated at Rp39.4tn and Rp17.8tn (50% and 22.6% of total outstanding), respectively. We expect the incoming bids to moderate to ca. Rp27tn (range: Rp22tn 32tn), below the Rp33.1tn in the previous auction.
The rupiah yield curve has bullishly steepened. Compared to the previous sukuk auction on 19-Aug, the rupiah yield curve has bullishly steepened: the 2-yr yield fell significantly by 23 bps to 5.38%, and the 10-yr yield was flat at 6.41%. We forecast the fair yields for the bond series to be auctioned today as follows: 5.00% (range: 4.95-5.05%) for the 6-mo SPNS, 5.05% (range: 5.00-5.10%) for the 9-mo SPNS, 5.45% (range: 5.40-5.50%) for the 1.4-yr PBS003, 5.50% (range: 5.45-5.55%) for the 2.9-yr PBS030, 5.65% (range: 5.60-5.70%) for the 4-yr PBSG001, 6.57% (range: 6.52-6.62%) for the 13.8-yr PBS034, and 6.87% (range: 6.82-6.92%) for the 24.3-yr PBS038.
