Lowest ever bond yield still lucrative
ORI014, offers a less lucrative yield compared to those in 2012 and 2016 Selling agents demand for the bonds not as high as government expected
Henny Galla, a 29-year-old private employee living in Jakarta, has been buying retail government bonds (ORI) as an alternative investment in recent years.
She pays close attention to the bonds’ yield after taxes and bank administration fees, because she can only afford a small amount of ORI subscriptions.
“If the yield can’t cover the banks’ monthly administration fees, [the bonds] become less attractive,” she said on Friday.
She is of the view that this year’s retail bond, namely ORI014, offers a less lucrative yield compared to those in 2012 and 2016 of 8.5 percent and 6.6 percent per annum, respectively. But that has not diminished appetite for the product.
The government on Friday kick-started the offering period for tradable ORI014, with a tenor of three years and a yield of 5.85 percent per year, the lowest in history.
Retail investors can order a minimum of Rp 5 million (US$371) worth of bonds and a maximum of Rp 3 billion at 18 banks and one securities firm, which act as selling agents. The order has been be opened until Oct. 19 while the allocation and settlement dates are set on Oct. 23 and 25, respectively.
Henny, however, said she could understand the situation as the lower yield signaled the country’s better economic fundamentals.
“For those who have a lot of money, the bond is still attractive as its yield is still higher than the bank’s time deposit interest rate,” she added. “Moreover, there will be cuts in the time deposit interest rate going forward.”
Bank Indonesia (BI) has lowered its policy rate — the sevenday reverse repurchase (repo) rate — by 25 basis points (bps) to 4.25 percent this month after slashing it off last week. Such a cut brings the 12-month benchmark interest rate hovering at 5.5 percent.
The rate cut should translate into lower bank deposit and loan interest rates.
Fixed income analysts, meanwhile, are of the view that the offered yield remains lucrative for retail investors as it is higher than the deposit rate.
“Moreover, this instrument is fully guaranteed by the government, unlike the time deposit that is guaranteed by LPS [Indonesia Deposit Insurance Corporation] only up to Rp 2 billion,” BNI Sekuritas fixed income research head Ariawan said.
RHB Banking Group debt capital market assistant vice president Adra Wijasena said despite still being lucrative, the offered yield was somehow lower than expected.
ORI011 and 012, for instance, offered yields 100 bps higher than the rate of three-year government bonds. However, starting last year, the retail bonds’ yield is offered around the same rate of the three-year debt papers, which currently stood at around 5.9 percent, he said.
The government has argued that the country is currently in a low interest rate environment due to its relatively high economic growth of around 5 percent and benign inflation of below the targeted 4.3 percent this year, the Finance Ministry’s financing and risk management director general Robert Pakpahan said on Friday.
Indonesia Bond Pricing Agency (IBPA) data show that the 10-year government bond yield stood at 6.75 percent on Friday, up from around 8 percent in January.
“We see [the yield of ] 5.85 percent is still lucrative because ORI is guaranteed by the government, and is tradable at the secondary market. ORI also has lower withholding tax at 15 percent compared to that of time deposit at 20 percent,” Robert said.
The government initially expects to reap Rp 20 trillion from the ORI014 issuance to be added into its gross bonds issuance target of Rp 712.9 trillion by the year-end.
However, based on the survey conducted by the selling agents, they can only sell around Rp 13.4 trillion of the retail bond.
Robert said the government would look into whether it could upsize the amount. The government will still have eight more bond auctions this year.
As of Sept. 26, government bond issuance has reached almost 83 percent of the target.