BI to appoint market makers to push treasury bond trading

JAKARTA (JP): Bank Indonesia, the central bank, said on Wednesday it would soon appoint "market makers" to help activate the current dormant secondary market for treasury bonds.

Bank Indonesia deputy governor Miranda S. Goeltom told journalists that the central bank was currently short-listing potential candidates for market markers.

"They could be any entity, banks, mutual funds or investment banks like Danareksa," Miranda said, referring to the state investment bank.

She said the candidates for market makers should be large entities because they must be able to place bids and offerings in the market at any time. They must have a good network and reliable infrastructure to support bond trading.

In return, the market maker will be given some privileges by the central bank, including a privilege to conduct short-selling and to present the first bid for new government bonds.

"This is a common practice in other countries, to entitle market makers to those privileges," she said. "With market makers, the goal will be to help create an active secondary market for our treasury bonds."

Only a small fraction of the multi-billion treasury bonds currently held by recapitalized banks have been traded on the Surabaya Stock Exchange since Feb. 1, the first trading day for the bonds.

After two weeks with no bond transactions, Bank Central Asia finally managed to sell Rp 1 billion (US$137,000) of its treasury bonds last week to Bank Buana Indonesia at 96 percent of par value.

The government has so far issued bonds worth Rp 282 trillion to finance the recapitalization of the country's ailing banks.

Miranda noted that only bonds carrying fixed and variable interest rates could be tradable, while so-called hedge bonds to cover banks' foreign exchange obligations could not be traded.

The tradable bonds currently total Rp 255 trillion. In the first stage, the central bank only allowed 10 percent of the tradable treasury bonds, or Rp 25.5 trillion, to enter the secondary market.

Miranda said eligible banks thus far have registered bonds worth only Rp 2.17 trillion, out of the Rp 25.5 trillion allowed to enter the market.

"This indicates those banks enjoy over-liquidity; they do not want to sell their treasury bonds. This is one of the reasons why bond trading has been slow," she said.

Another reason for the slow trading is the fact that the treasury bond market is still new and underdeveloped, and market players are overly cautious to trade.

"Trading of treasury bonds is a new thing for Indonesia and both sellers and buyers need to learn before trading," she said.

She noted that traditional institutional bond buyers like pension funds and insurance firms were not accustomed to investing in treasury bonds in Indonesia. It will require some time for institutions to invest in Indonesia's treasury bonds.

"Therefore, it is fair to say that this underdeveloped government domestic bond market is one of the reasons for the slow bond trading," she said.

Another reason would be the interest rates the bonds offer, which the market perceived as unattractive, because they were far below the rates offered by corporate bonds.

Tradable treasury bonds have fixed rates and variable rates, adjusted with the central bank's benchmark rates.

Fixed rate bonds include a five-year bond maturing in September 2004 with a 12 percent coupon, payable semi-annually. The government has issued Rp 22.41 trillion worth of this type of bond.

The other type is a 10-year bond maturing in June 2009, carrying a coupon rate of 14 percent. Some Rp 28.88 trillion has been issued.

The government has also created 16 series of variable rate bonds worth Rp 203.9 trillion with maturities ranging from July 2002 to July 2009. The interest rates of the bonds are payable quarterly. The interest rate is set quarterly in advance based on the interest rate of the central bank's three-month promissory notes.

Miranda said government bond rates were actually attractive if investors looked at the near term prospects.

"If you look at it now, yes, they are not attractive. But if you look at near term or even longer prospects, you will see that these bonds are attractive because inflation will remain low and interest rates will fall from time to time," she said. (rid)