Bond yields shaken in 2015 despite last quarter surge

Winning bond yields, after rising quite significantly in June, thereafter moved essentially sideways until the end of the year. Although the demand for government bonds and the liquidity of the market were both high at year-end, bond yields did not decline for three reasons: strong credit growth, exchange rate fluctuations, and a substantial supply of bonds in the primary market.

The fourth quarter of 2015 is now notable as the most successful period in the history of Vietnam’s bond market. The winning rate of weekly bond auctions during the quarter was consistently high, from 70 to over 90 per cent. VND130,666 billion ($5.96 billion) worth of bonds were issued out of a total of VND159,951 billion ($7.30 billion) offered. The market attracted many investors during the quarter due to the ample supply of three-year bonds as approved by the National Assembly. Additionally, the State Treasury (ST) introduced new products in December, such as long-coupon bonds, and zero-coupon bonds with three-year maturities, which were both mobilised 100 per cent successfully at their auctions. Furthermore, the demand for bonds in the fourth quarter of last year increased as investors rolled over a large amount of bonds that came due in October (worth approximately VND22,132 billion or $1.01 billion).

In 2015, bond yields increased quite strongly compared with the previous year. After rising in June, bond yields remained relatively stable until the end of the year. The rise in bond yields in June was mainly due to low market demand for bonds; however, an increase in bond issuance in the last quarter of the year did not then cause bond yields to fall. By the end of the year, issued yields for five-year bonds in the primary market had risen by 18 bps on-year, reaching 6.58 per cent per annum. Yields of ten-year bonds were 6.95 per cent per annum, up 76 bps on-year, and three-year bond yields rose by 55 bps on-year, to 5.74 per cent per annum by year-end. Only fifteen-year bond yields declined slightly, by 15 bps compared with last year, to 7.65 per cent per annum.

Bond yields during 2015 remained high because of exchange rate fluctuations and a large supply of bonds in the primary market, despite an improvement in bond issuance in the last quarter. Fluctuations in exchange rates caused investors to fear a further devaluation of the dong, making VND-denominated fixed-income assets less attractive than foreign-currency speculation – concerns which also worried foreign investors. In addition, because of disappointingly low issuance in the previous quarter, a large volume of bonds was offered in the fourth quarter. Bond yields were kept high to entice investors to participate in the bond auctions even as credit outstanding grew significantly toward the end of the year.

We believe that bond yields are likely to rise further next year for the following reasons:

lAlthough the plan for bond issuance next year has not yet been officially announced, the National Assembly has agreed to issue VND60,000 billion ($2.74 billion) of government bonds for investment only (in addition to budget-financing bonds) and $3 billion of international bonds. We also think that a large volume of bonds will be offered next year to support the state budget. The National Assembly approved issuance of three-to-five-year bonds with a volume of no more than 30 per cent of total bond issuance, which in turn means that 70 per cent of total bonds offered will have more-than-five-year maturities. Large-scale banking investors prefer three-year bonds to more-than-five-year bonds because of their high liquidity and lower risk.

lThough the bond supply will be strong next year, demand seems to be lower than supply, with weakened demand from both foreign and domestic investors.

lThere is significant pressure on the USD/VND exchange rate, originating in concerns over further devaluation of the Chinese yuan as a result of China’s economic slowdown, and a possible Fed rate hike in 2016. Domestic investors will likely withdraw some of their capital to speculate on foreign currency as exchange rates rise, instead of purchasing VND-denominated bonds. Moreover, credit growth is expected to be high (18 to 20 per cent), and the banking system will continue with restructuring activities in 2016, which may limit the capital banks have available for government bonds.

lVND depreciation pressures will undoubtedly discourage foreign investors from government bonds. Furthermore, Vietnam’s credit default swap (CDS) spread was high at the end of 2015 (285 points, up 87.9 bps on-year), implying significant risk in Vietnam’s government bonds. If government debt continues to increase in 2016, government bonds will become even riskier, and thus bond yields will rise further.

As a result, we believe bond yields will rise to the levels of 2014, or around 7–7.30 per cent for five-year bonds.

Nguyen Thi Ngoc Anh Research Department VPBank Securities