BI to appoint market makers to push treasury bond trading

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.
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