Government retail bonds: A rising star

Budi Susanto ,  Analyst   |  Fri, 03/14/2008 1:20 AM  |  Business

The government has issued a fourth batch of retail bonds (ORI) with total proceeds up to Rp 13.46 trillion.

Despite a shaky bond market, the issuance was the biggest since August 2006, when some Rp 3.28 trillion was raised during the first distribution, while the second and third generated Rp 6.23 trillion and Rp 9.37 trillion, respectively.

ORI buyers in the primary market must be individuals and Indonesian citizens in possession of valid ID cards.

In the secondary market, institutional investors, as well as individuals, are allowed to trade retail bonds and hold them in their portfolios.

The bonds attract retail investors by offering superior benefits compared to non-government bonds and investments.

First, ORIs provide better yield than other fixed income instruments. Second, they have a very low credit risk and third, coupon payments are made monthly rather than quarterly.

The government remains keen to issue the bonds because their outstanding value is less than that of government institutional bonds (SUN).

Following the latest issuance, the total amount of outstanding ORIs climbed to Rp 32.34 trillion, far lower than the Rp 485 trillion of outstanding SUNs.

In line with all government debt, ORIs are issued by the Finance Ministry and are guaranteed by the government, making them almost risk-free.

However, the highest draw comes from the ORIs' coupon rate. In all issuances, the government has provided a "sweetener" to individual buyers in the form of yields higher than those warranted by their investment characteristics.

For example, ORI004 has a coupon rate of 9.5 percent, giving it a premium of at least 2.5 percent over time deposits. ORI004 also has a 50 basis point premium over SUNs with similar maturity periods.

Therefore, the yield differential between ORI and SUN bonds can lead to gains in the price of ORIs if they are later traded on the secondary market.

Given the attractive coupon rate, higher yield and shorter maturity, ORI prices remain less volatile than SUN prices, leading investors to prefer ORIs as investment options rather than for trading.

Although ORIs help the government diversify its funding, its current mix of retail and institutional bonds is far from ideal.

There is still room for more ORI bonds to be issued especially because their short maturity period will cause owners of previously released bonds to seek new ones when their series reaches maturity.

However, there are two areas of concern regarding the further issuance of ORIs.

First, ORIs may not always give investors a premium return over institutional bonds.

If they do, the government's aim to diversify the bond market by luring more retail investors will never work.

A yield differential between retail and institutional bonds will give retail investors an incentive to sell in the secondary market to group investors, giving retail investors an opportunity to make a capital gain.

The second factor pivots on the government's decision to continue to prevent institutional investors from buying ORIs in the primary market. It may be seen as unfair to give differential treatment to institutional investors in the primary and secondary markets.

Despite these concerns, ORIs have helped to create a more dynamic domestic bond market over the last one and a half years.

Looking ahead, more issuances of ORIs should help to improve market structure.

The writer is a debt market analyst at PT Danareksa Sekuritas

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