Climbing coupon rates leave buyers in the cold

Soaring inflation has led to increased bond coupon rates which is bad news for government bond sales

Last Thursday’s government bond auction finished with VND100 billion ($4.8 million) changing hands out of State Treasury’s total of VND1 trillion ($48.3 million) in three-year bonds.

None of VND1 trillion worth of five-year bonds on offer was sold.

A Vietcombank source said in a scenario where coupon rates were rising, local financial institutions might be opting to wait before buying bonds.

“For instance, if we bought government bonds via auctions in March, the coupon rate was clearly lower than in April auction. Normally, the highest coupon rate is set when inflation peaks,” said the official.

He added that further tightened monetary policy had pushed up the market interest rate and, thus the coupon rate.

In the latest auction, the coupon rate cap for three-year paper was set at 11 per cent per annum, or the same rate as at the previous auction, while the minimum bidding rate was 13.3 per cent per year.

For five-year bonds, the cap stood at 17 per cent, per year while the floor bidding rate was 13.3 per cent, per annum.

On April 29, with Decision No.929/2011/QD-NHNN, the State Bank decided to raise the both the refinancing rate and overnight lending rate by 1 per cent to 14 per cent, repeating a similar move made in March.

Accordingly, last week, the State Bank decided to lift the 7-day rate for lending to local banks via the open market operations (OMO) window from 13 to 14 per cent, per year.

Nguyen Thi Kim Thanh, head of the central bank’s Banking Strategy Institute explained that with government bond yields at around 13 per cent per year, borrowing from the State Bank at a rate of 14 per cent per year was not profitable. Via OMO, the authority is lending to local banks with collateral being valuable paper such as government bonds.

“Bond issuances are generally very sensitive to market rate changes. Thus, despite successes in previous auctions, the one on April 28 was a complete failure,” said Thanh.

On April 21, VND350 billion ($17.5 million) worth of 3-year bonds was taken at a yield of 12.3 per cent per year. At the same time, VND301 billion ($15 million) worth of 5-year bonds was taken at a yield of 11.9 per cent per year.  The two lots were sold out of the State Treasury’s offer of VND1 trillion ($48.3 million) worth of 3-year bonds and VND1 trillion of 5-year paper.

On April 22, Vietnam Development Bank successfully sold VND400 billion ($20 million) worth of 10-year government bonds of VND500 billion ($25 million) on offer at yield of 12 per cent per year.

It is worth noting that those auctions were the first and second time this year that government bond issuers accepted to pay a yield at 12-or-above per cent, per year.