ART OF PRESERVING

WEALTH: FROM ONE

RISK TO ANOTHER.
A Bonds Market Outlook by
Trizar Rizqiawan

Classification: Personal
 CONTENT
Global:
Biggest Risks
Performance of G20 Bonds
​Interest and Currencies
Defaults and Liquidity Risk
​G20 Macro Matrix and Valuation
Local:
Indonesia Bonds Performance
Fiscal as Technical Drive
Peaking Rate Hike Cycle vs Currency Risk
Corporate Bonds
2024 Election and Bonds Market
Classification: Personal
 From One Risk to Another 3

GLOBAL
We talk about the risks, the opportunity and how markets have performed. In this
high interest rate environment, we already saw financial and non-financial institutions
collapsed, and some other acquired by bigger names. However, high interest rate is
likely to be with us until next year as real wages is still below inflation.
Rivalry between the West and the East will only get hotter. From trade war, capital
war, geopolitical war, commodity war and military war. The advancement of
technology also increases the risk in cybersecurity.
Thus, risks are there, and we need to prepare, and find better place to preserve our
wealth.

Classification: Personal
 From One Risk to Another 4

BIGGEST RISKS IN 2023-2024

I prefer to list these 3 main risk that we are going to face in 2023-2024 as they are most of the time
are intertwined and mutually enforcing one another

Geopolitical Cybersecurity Supply Chain

Risk Risk Risk

Highest geopolitical risks currently
happening are Russia-NATO
conflict, US-China rivalry which
also draws Taiwan on to the stage.
Meanwhile, Yellen visit to China
did not result anything good to
assure China absorbs the UST
issuances.
Cybersecurity risk covers
misinformation and
disinformation, cybercrime and
digital inequality. The rise of AI
will only increase cybersecurity
risk as regulations tend to come
late.
The recent Gallium ban by China will
create enormous supply chain risk to
high technology products and
semiconductor manufacturing. The
geopolitical tension happening today
increases protectionism and
commodities weaponizing which
leads to cost-of-living crisis in import
heavy oriented countries.

Classification: Personal
 From One Risk to Another
GEOPOLITICAL RISK
Source: BlackRock Investment Institute
The Russia-NATO war with Ukraine as battlefield but that has been
happening for a year and probably will be longer than many of us
expected. The latest Grain Deal withdraw by Russia fuels commodity
prices increase and could put poor countries into food insecurity such as
Egypt, Pakistan, Bangladesh and Sri Lanka. As this risk is already priced
in by market, the significance eases but new fronts could emerge.
Classification: Personal
5
Meanwhile as US is still very confident to be the sole hegemon,
undermining China power will also be focus. This could be in forms of
trade war, capital war, technological war, and proxy geopolitical war via
Taiwan. However, I learn from Cold War that when 2 great powers collide,
one of them will de-escalate before involving military war knowing the
risk is too big to handle.
 From One Risk to Another 6

CYBERSECURITY RISK
Question:
“How likely is it that
geopolitical instability will lead
to a far-reaching, catastrophic
cyber event in next 2 years”

More than 80% of business

leaders and cyber leaders take
geopolitical risk as possible
trigger for catastrophic cyber
event. This considers cyber
attacks, espionage, data
breaching, and risk to digital
financial system.

Source: WEF Global Cybersecurity Outlook 2023 Insight Report

Classification: Personal
 From One Risk to Another 7

SUPPLY CHAIN RISK

The next superior
semiconductor materials will
provide us better efficiency,
higher operation frequencies
and higher temperature
operation. These materials are
used in 5G, electronics,
lighting, radar and advance
military technology such as
precision guided munitions.

China controls 98% of world’s

supply of raw Gallium. There
are 4 major countries which
have substantial reserves of
Gallium, namely China,
Indonesia, Australia and
Congo. However, so far only
China can extract the material
from bauxite.

Classification: Personal Source: US Department of Energy and CSIS

 From One Risk to Another
IMPLICATIONS OF 3 MAIN RISKS
Volatile Prices
Higher cost of living
Limited upside on wages
High interest rate for longer period
Risk on internal political order
Less demand on UST, higher yield
Classification: Personal
Slower global growth
Disrupted supply chain
Technology decoupling
Polarised trade networks
Disconnected financial infrastructure
8
Currency Problem
Barrier to access reserve currencies
Defaulting USD debt from non-US
issuers
Limited flows as hedging costs rise
Currency value depends on
commodity ownership and/or
technology ownership
 From One Risk to Another 9

PERFORMANCE OF LOCAL CURRENCY 10YR BONDS OF G20

Performance of G20 Bonds Performance of G20 Bonds

40.00% 80.00% Brazil, Indonesia, India, Mexico

EM bonds were more resilient vs and China local currency bonds
DM bonds in 2022-2023 where performed well in last 5yr.
30.00% rate hike cycle hit. 60.00%

20.00% 40.00%

10.00% 20.00%

0.00% 0.00%
l a a y e ia a ly n ea co a l ia il a a y e ia a ly n ea o
US ica
lia razi nad in an nc UK es di It a pa or xi US r ic az ad in an ranc UK es In
di Ita pa or ic r
r a h m r a n In Ja e f ts ra Br Can Ch erm n Ja K ex Af
st B Ca C r F do K M A F
nd
o M
Au Ge In S S Au G I S S
-10.00% -20.00%

-20.00% -40.00%

-30.00% -60.00%

2019 2020 2021 2022 2023 1Yr 3Yr 5Yr

Classification: Personal Source: Bloomberg, Self-calculation

 From One Risk to Another 10

INTEREST RATE AND CURRENCIES

Currencies Performance
40.00%
Mexico had great time post Trump. Japan lost much of its
currency value to due yield curve control. S Korea had
30.00% significant outflows and widening trade deficit due to
supply chain issue. S Africa has been dealing with
20.00% multidimensional crisis such as energy crisis and social-
political crisis, hence the outflows.
10.00%

0.00%
AUD BRL CAD CNY EUR GBP IDR JPY KRW MXN ZAR

-10.00%

Fed rate peaks at 5.5% and -20.00%

expected to stay at that level until
mid 2024. We probably will see -30.00%
rate cuts as soon as 3Q2024.
-40.00%

1Yr 3Yr 5Yr

Classification: Personal Source: The Fed, Bloomberg, Self-calculation

 From One Risk to Another
DEFAULTS AND LIQUIDITY RISK
Classification: Personal
11
US HY defaults are China is still struggling
projected to get higher in with its property defaults
2023 after slowed down in which account for big
2021 and 2022. Rising chunk of its total USD
interest rates will make bonds outstanding. Higher
some business models FFR will only make it
unsustainable. harder for them to repay
and the only option is to
move into domestic bonds
Source: US Department of Energy and CSIS issuances.
 From One Risk to Another 12

G20 MACRO MATRIX AND VALUATION

Fundamental
Econ Monetary Fiscal Trades Labor Market Market Overall
GDP Central Bank 10Yr Deficit to Debt to Trade Unemployment
Region YoY PMI CPI YoY Rate Yield GDP GDP CAD Balance Rate Yield 10yr Value Score
Australia 2.30% 44.7 6.00% 4.10% 4.028 -2.67% 41.60% 23.9 99.6 3.50% 4.03% 8
Brazil 4.00% 46.6 3.16% 13.75% 10.789 -6.42% 84.00% -50 73.3 8.00% 10.79% 9
Canada 1.90% 50.2 2.80% 5.00% 3.5149 -0.49% 89.70% -14.2 4.9 5.40% 3.51% 7
China 6.30% 49.3 0.00% 4.35% 2.674 -4.70% 47.80% 398.1 892.6 3.96% 2.67% 9
Germany -0.20% 38.8 6.20% 4.25% 2.4255 -2.60% 66.30% 180.7 133 2.90% 2.43% 5
France 0.90% 44.5 4.30% 4.25% 2.9534 -4.70% 111.60% -5.7 -158.2 7.00% 2.95% 5
United Kingdom 0.20% 45 7.90% 5.00% 4.2677 -2.30% 85.40% -66.4 -61.7 4.00% 4.27% 6
Indonesia 5.03% 52.5 3.52% 5.75% 6.238 -6.84% 28.90% 15.6 49.4 5.45% 6.24% 10
India 6.06% 57.8 4.81% 6.50% 7.103 -6.84% 70.20% -68.4 -270.7 8.50% 7.10% 9
Italy 1.90% 43.8 6.40% 4.25% 3.5135 -8.00% 144.40% -15 -7 7.64% 3.51% 6
Japan 1.90% 49.4 3.30% -0.10% 0.466 -4.30% 236.40% 82.8 -138.1 2.60% 0.47% 7
South Korea 0.90% 47.8 2.70% 3.50% 3.68 -7.57% 39.80% 7.6 -63.3 2.60% 3.68% 10
Mexico 3.73% 50.4 5.06% 11.25% 8.863 -6.23% 54.20% -17.6 -20.4 2.96% 8.86% 10
Russia -1.80% 52.6 3.25% 8.50% 11.5 0.80% 17.40% 178.8 211.2 3.20% 11.50% 9
United States 2.60% 46 3.00% 5.50% 3.8845 -8.49% 82.30% -907 -849.5 3.60% 3.88% 9
South Africa 0.20% 47.6 5.40% 8.25% 11.592 -4.60% 52.70% -3.7 5.6 32.90% 11.59% 8

Classification: Personal Source: Bloomberg, Self-calculation

 From One Risk to Another 13

STRATEGY
• Note that even if Russia has good score, it has been sanctioned by the West allies. This results constraints of
getting price, access and liquidity of Russian bonds.
• For USD bonds, it is quite clear that interest rate will likely stay high for long to tame inflation and bring back
purchasing power. Geopolitical tension is adding volatility to prices via supply chain disruptions and
protectionism. Fitch move to recently downgrade US credit rating cements the high for long yield as supply of
US Treasury keeps abundant but state buyers like China are reducing demand. I prefer to stay neutral or slightly
underweight on USD bonds.
• For local currency, my top picks are Indonesia, South Korea and Mexico. Indonesia is undergoing fiscal
consolidation post Covid and having its inflation is declining rapidly. South Korea might got hit economically
as it relies on exports products heavily and the 3 main risks are undermining its exports, but on the other hand
its inflation is declining, and the country is fiscally prudent. Mexico started tightening earlier which I believe
they will cut earlier as well, just like other LatAm countries. Also, it has been enjoying strong currency so far
post Trump. Thus, overweight duration for the 3 local currency bonds.
• When it comes IG vs HY, I prefer to stick with IG as the 3 main risks will impact negatively more to the HY as
they are less capitalized. Other than that, the liquidity issue also something we should consider in investing in
HY.

Classification: Personal Source: US Department of Energy and CSIS

 From One Risk to Another 14

LOCAL
The local currency bonds have performed very well this year despite Fed lifted
interest rates and has brought volatility to the currency. On the other side, the prudent
fiscal management has attracted much of inflows to domestic bonds market but still
below the pre-pandemic level. The impact of Bank Indonesia introduction of USD
tools to attract exporters placing USD onshore remains to be seen due to high
exposure of commodities owners in politics. The elephant in the room is the default
events happening in state-owned-companies, which dries up corporate bonds'
liquidity.

Classification: Personal
 From One Risk to Another 15

INDONESIA BONDS PERFORMANCE

IDR Bonds Performance
16.00% Corporate Sukuk performed
Best choice for rate cut well in rate hike cycle, but
14.00% bear in mind that liquidity is
cycle is to put more long
duration Govies in either not taken into account in the
12.00%
conventional bonds or chart.
sukuk as they have long 10.00%
duration and much more
liquid for banks. 8.00%

6.00%

4.00%

2.00%

0.00%
IDR Govt Bonds IDR Corp Bonds IDR Sukuk Govt IDR Sukuk Corp Sukuk Govt hit hardest
during rate hike cycle as
2020 2021 2022 2023 blended duration is higher vs
conventional one.
Source: Bloomberg, Self-calculation

Classification: Personal
 From One Risk to Another 16

FISCAL AS TECHNICAL DRIVE

The MoF managed
to put back deficit
to GDP below 3%
in 2022, faster
than initially
planned in 2023,
thanks to
commodity boom.

So far this year,

Govt still
recording budget
surplus and is
expected to reach
deficit target of
2.3% of GDP in
2023. Issuances
would likely to be
lower than
estimated.
Source: Indonesia MoF
Classification: Personal
 From One Risk to Another 17

PEAKING RATE HIKE CYCLE VS CURRENCY RISK

Trade Balance and USDIDR Consecutive Drop in FX Reserves Weakens IDR
10000 18000 18000 160

17000 17000 150

8000 16000
16000 140
15000
6000 15000 130
14000
14000 13000 120
4000
13000 12000 110
2000 11000
12000 100
10000
0 11000 90
9000
1 1 2 2 3 3 4 5 5 6 6 7 8 8 9 9 0 1 1 2 2 3
n -1 g-1 r-1 t-1 y-1 c -1 l-1 b-1 p-1 r-1 v -1 n -1 b -1 p -1 r-1 v -1 n -2 n -2 g -2 r-2 t-2 y-2 10000 8000 80
Ja u a Oc a e -Ju Fe Se p o Ju Fe Se p o Ju Ja u a Oc a
3 - 5-A 8-M 10 - 4 -M 6 -D 18 19 - 23 - 6 -A 8 -N 30 - 1- 5- 9-A 1 -N 12 - 14 - 8 -A 2 -M 24- 6 -M
-2000
1 1 11 1 2 12 13 14 1 4 15 15 1 6 1 7 17 1 8 19 19 20 2 0 21 2 2 2 2 2 3
1 1 2 2 1 1 2 2 9000
a n- ug - ar- o v- un - eb - e p- pr- ec- Ju l- ar- ct- ay- an - ug - p r- ov - un - eb- e p- ay -
J J F S - O J J F S
3- 6 -A 8 -M 8-N 21 - 3- 16 - 9 -A 0-D 22 6-M 17 - 0 -M 10 - 3 -A 6-A 7 -N 30 - 10 - 23 - 8 -M
-4000 8000 1 2 2 1 3 2 1

ID Trade Balance USDIDR USDIDR FX Reserves

The story of continuous weakening IDR only prevails when trade FX rose by USD 40bn or around 40% in last 13 year or
balance in deep negative. Rate cycle can only add volatility if the around 3%-ish annually. Govt needs to find ways to repatriate
rate movement is very significant like in 2022. $ from exports back on shore, or else move away from issuing
global bonds to local currency bonds.
Classification: Personal Source: Bloomberg, Self-calculation
 From One Risk to Another 18

CORPORATE BONDS
AAA Spreads AA Spreads A Spreads
250 300 500

250 450
200

200 400

150
150 350

100 100 300

50 250
50

0 200
28 Feb 8
-A -19
-M -19
-S 20
Ap 0
-O 21

ay 2
1 6 ay 1
-N -22

-Ja 18

Ja 9

-D 20

De 1

17 o v 2
ay 2
-Ju 9

1- -20

-Ju 20

3
23 Jun 1
0 7- p-2

-M -2
- 1

M 2

-2

8- n-2

-N -2
-M -2
17 n-1
8- l-1

1- c-2

-2
1 3 ug -

23 ar-

20 r-
4 - ct -

2 3 ug -

23 u l-
1 6 ec-
31 o v
11 ug

n
e

J
A

A
1-

1-
Rating Bucket AAA Rating Bucket AA Rating Bucket A

Spreads are still below pre-pandemic level across ratings. Most attractive one is AA rated bonds with spreads almost back to pre-pandemic at 150bps. But
considering liquidity, I don’t see the spreads compensate fairly, let alone defaults are rising for SOE issuers.
Classification: Personal Source: Bloomberg, Self-Calculation
 From One Risk to Another 19

2024 ELECTION AND BONDS MARKET

Election Years are Associated with Lower Yield in the past 4 Elections
25
23

Despite that in 21
the last 4 19
elections yield
moved down but 17
IDR 10yr yield (%)

it’s commonly 15
preceded by a
sharp rise of yield 13
6-mo before the
11
election year.
9
7
5
3 2 2 1 0 9 8 8 7 6 5 5 4 3 2 2 1 0 9 9 8 7 6 6 5 4 3
g -2 ct-2 n-2 r-2 n-2 p-1 v-1 b-1 r-1 l-1 ct-1 n-1 r-1 g-1 v-1 b-1 y-1 g-1 v-0 b-0 y-0 g-0 v-0 b-0 r-0 l-0 p-0
u a a u e o e p u a p u o e a u o e a u o e p u e
-A 4-O 3-J 3-M 0-J 4-S -N 6-F 0-A 9-J 5-O 1-J 9-A -A -N 6-F -M -A -N 6-F -M -A -N 1-F 6-A 4-J 4-S
1 1 2 1 21 2 1 1 2 2 5 8 1 19 20 18 1 14 2 3 2 1 2

Classification: Personal Source: Bloomberg, Self-Calculation

 From One Risk to Another 20

STRATEGY
• Indonesia Govt bonds managed to perform very well in the 1H23, thanks to faster than expected budget
consolidation which leads to lower issuances and also huge inflows from foreign investors.
• I am forecasting yield to be around 6-6.5% at the end of the year as supply might get tighter going forward and
there is no more rate hike coming from central bank.
• In terms of duration, I prefer to be neutral-overweight in duration to anticipate further fall on CPI and Govt
Bonds auctions cancellations. However, some short-term volatility can create opportunity to add more duration.
• Currency will likely trade in range of 14500-15500 and trade balance will be progressing towards slight deficit
at the end of the year due to slowing global demand and easing commodity prices. I personally don’t think that
there will be continuous weakening IDR following higher for longer USD interest path as Indonesia is still
recording trade surplus.
• The recent defaults in state-owned companies need to be monitored further to seek indication of Govt’s willing
to solve the problem and respect the capital market community. Liquidity in corporate bonds will be very tight
following default events from SOEs, and I believe more to come.
• The only rating segment offering lucrative spread is AA, which already close to pre-pandemic level.

Classification: Personal Source: US Department of Energy and CSIS

 THANK YOU
Trizar Rizqiawan
trizarrizq@gmail.com
www.trizar.weebly.com

Classification: Personal