Government bond yields expected to rise in fourth quarter

Source: HNX, VPBS collected

Foreign investors exited Vietnamese fixed income markets during the quarter, mainly due to rising concerns of dong depreciation. Two factors fed these concerns. First, China’s economic slowdown affected emerging markets. The devaluation of the yuan by nearly five per cent over a three day period in August caused the State Bank of Vietnam (SBV) to devalue the dong by one per cent and increase the trading band from 1 to 3 per cent. Continuing weak macro data from China suggested the possibility that the yuan could decline further and other nations, like Vietnam, would need to follow suit. At the same time, rumours filled the market that the US Federal Reserve Bank (the Fed) would raise interest rates for the first time since the global credit crisis. These rumours strengthened the dollar against most currencies, including the dong. Global investors, being fearful of incurring currency losses, retreated from Vietnam and other emerging bond markets back to the safety of the dollar and net sold vast volumes of bonds and bills in the secondary market.

At the same time, domestic banks, the largest buyers of government bonds, also reduced their holdings. Through September, Vietnam’s banking system recorded its fastest year-to-date credit growth rate since 2011. Vietnam’s credit growth was especially strong during the third quarter, which implied that commercial banks diverted funds away from the bond investment in order to make loans.

From July to September 2015, total traded value of bonds and bills in the secondary market via outright and repo transactions stood at VND197 trillion ($8.85 billion), down 33.5 per cent compared to the previous quarter and down 17.6 per cent on year. As a result, the average value per month was recorded at VND65,715 billion ($2.92 billion).

Outright transactions continued to dominate the secondary market nearly every week, contributing 63.6 per cent of total quarterly transaction volume, or VND125 trillion ($5.61 billion). Meanwhile repo transactions accounted for 36.4 per cent, equivalent to VND71,695 billion ($76.1 million).

By tenor, the breakdown of outright transactions demonstrated that investors focused on short-term maturities, which are less than five years. Because there is no supply of less-than-five-year bonds in the primary market, demand for short-tenor bonds rose significantly, as they usually have higher liquidity and lower credit risks than long-term bonds. During the third quarter of 2015, trading of one-to-five-year bonds contributed 64.1 per cent of total transactions. Meanwhile, over-five-year bonds accounted for only 24.1 per cent. Investors focused on short-term tenors not only because of their high liquidity but also because of speculation about a rise in long-term yields in the near future.

Through September, foreign investors net sold VND721 billion ($32.4 million) in the secondary market this year through outright and repo transactions. In the third quarter, foreign investors sold a vast amount of bonds and bills. They net sold VND1,729 billion ($77.6 million) over the three months from July to September, which was 25 per cent higher than the net buying amount of the previous quarter.

Bond yields over the third quarter of 2015 surged up quite strongly at three, five, and 10-year tenors, compared to the last quarter, although not as much as they increased during the second quarter. The increasing pace ranged from 17 to 28 basis points.

As we move into the fourth quarter of the year, we see conflicting forces exerting themselves on the bond market, but we still expect yields to rise. The SBV has announced that they will support the value of the dong and has backed up these statements with the issuance of Decree 15, which effectively reduced holdings of dollars at Vietnamese banks and thereby increased demand for the dong.

Confidence in a stable dong should improve demand for government bonds. In addition, we are hopeful that the Ministry of Finance’s proposal to begin issuing less-than-five-year bonds again will be approved in November and thus increase the liquidity of both the primary and secondary bond markets. Bond yields therefore will be likely to cool down for over-five-year tenors. At the same time, we expect a repeat of September’s situation regarding the US Fed as it approaches its December Open Market Committee meeting with renewed speculations impacting emerging markets, including Vietnam.

By Nguyen Thi Ngoc Anh Research Department VPBank Securities