Global economic shifts affect goverment bond issuances

As of September 2015, the government fulfilled only 38.6 per cent of its annual bond issuance plan. The overall winning rate for the quarter stood at 31.7 per cent, slightly below the 32 per cent level of the second quarter. Winning bond yields did manage to remain quite constant in the third quarter, after rising quite significantly in the second quarter, though.

Slowing bond sales in the third quarter were mainly due to the following reasons: strong demand for credit, decline of the dong against the dollar, and lower-than-expected bond yields, which failed to attract investors. Due to a decrease in the demand for bond purchases, bond yields will be likely to rise in the near future in order to attract the necessary funds back to the market.

During the third quarter, the government successfully mobilised only VND33,819 billion ($1.50 billion) worth of bonds and bills in the primary market, down 46.3 per cent compared to the same period last year. From the previous quarter, issuance rose by a mere 0.2 per cent, remaining nearly the same as the volume issued in the second quarter. Government and government-guaranteed bonds made up VND25,819 billion ($1.15 billion), down 55 per cent compared to the same period last year. For the full year through September 2015, the total volume of bonds and bills issued was VND137,514 billion ($6.11 billion).

Bonds issued by the State Treasury (ST) during this year’s first nine months totalled VND96,470 billion ($4.29 billion), completing only 38.6 per cent of its yearly issuance plan. The Vietnam Bank for Social Policies (VBSP) and the Vietnam Development Bank (VDB) successfully mobilised a respective VND8,459 billion ($376 million) and VND9,545 billion ($424 million) by the end of this year’s third quarter. In terms of issued bond maturities, five-year bonds and fifteen-year bonds contributed 64.6 per cent and 24.2 per cent of the total volume, respectively.

In the second quarter, the ST raised the issued bond yields due to low demand. However, yields remained flat while demand continued to decline considerably. Investors therefore diverted their funds away from the bond market. The ST kept five-year bond yields around 6.4 to 6.5 per cent per annum during July and August. Similarly, ten-year and fifteen-year bonds stayed at 6.7 per cent and 7.65 per cent per annum respectively during these two months. Because of the low winning rate of auctions in this quarter, the ST raised five-year bond yields by 15 basis points (bps) by the end of the quarter, to 6.6 per cent, and ten-year bond yields by 20 bps, to 6.9 per cent per annum.

The bond issuance amount stayed low for two consecutive quarters because of a slump in demand by commercial banks and financial institutions. Instead, these institutions diverted their funds from the asset market to credit activities. As of September 2015, the credit growth of the whole banking system stood at 10.78 per cent, reaching its highest growth rate since 2011. At the beginning of the year, the government set the credit growth target at 13 to 15 per cent. According to economists and analysis by the Asian Development Bank, this year’s credit growth will surpass the government target and accelerate further in 2016.

Demand for government bonds was also affected by exchange rate adjustments following the Chinese devaluation and the US Federal Reserve’s decision to hike interest rates. China allowed the yuan to be devalued by 5 per cent over a three-day period and Vietnam responded by devaluing the dong by 1 per cent and widening the trading band by 2 percentage points. Soon afterward, investors grew fearful of further devaluations amidst rumours that the Fed would raise borrowing costs at its September meeting. As it turned out, the increase did not happen, but it is still looming on the horizon, which is not welcome news to fixed income investors in emerging market currencies.

The one piece of good news came from the inflation reports. In large part due to falling commodity prices (especially oil), Vietnam has reported near 0 per cent inflation for the year to date. This, of course, increases real (inflation adjusted) yields on bonds and makes them more attractive to investors.

Unfortunately, the same falling oil prices that lowered inflation also dented state budget revenue. Although the government has made up for this with higher tax collections, we believe that government bond yields will be likely to increase in the next quarter in order to raise additional funding for the state budget. Government bonds normally contribute 70 per cent to the demand for budget fundraising. However, this year, they have hardly fulfilled the issuance target of the government to support the state budget. As a result, to improve the liquidity of the primary bond market, the ST might have to accept higher costs across all tenors.

By Nguyen Thi Ngoc Anh Research Department VPBank Securities