Investors shift as bond yield drops

Government bond investments have lost their charm for many investors looking for the next market pick up
Photo: Le Toan

Last week, government bond yields decreased still further, even stooping below the ceiling deposit rate of 7.5 per cent per annum. The bond yields on three-year terms stayed around a paltry 6.8 per cent per annum.

“The current level of winning rates is already approaching acceptable mid-term levels and the probability of  a sharp plunge is insignificant,” said a Vietcombank Securities report last week. 

The rebound was sparked by recent positive feedback from the financial markets such as signs of credit growth and the establishment of the Vietnam Asset Management Company (VAMC) which inspired bond investors to forecast an early rebound for government bond yields. Long-term bonds would see the quickest recovery according to many bond traders.

“Our bank has stopped investing in government bonds at this time,” said a deputy head of investment at a state-run bank.

According to the source, finding alternatives to government bonds was no easy task, as most cite risk avoidance at their top priority.

Despite the fact that banks gradually reduced disbursement on government bonds, it does not mean that banks found a way out for credit.

Head of treasury at a state-run bank claimed that despite recent signs of credit growth, the rate was still very low, lacked stability and that large amounts of capital were now stuck in banks instead of circulating in the economy.

“Meanwhile, other channels such as equity, foreign exchange and lending on inter-bank markets with higher risks and lower liquidity are not as attractive as government bonds,” he said.

This source said the short-term solution for banks was to reduce deposits from customers and other markets in order to reduce the pressure to boost capital in a high risk situation.

For bond investment funds which are not under pressure to clarify the balance sheet, it is also not easy to find another channel to replace government bonds.

“The discovery of new investment channels is urgent but difficult,” said a fund manager.

Dragon Capital’s Vietnam Debt Fund (VDeF) said the fund would change from holding short-term bonds to long-term ones. Specifically, it would hold 7-10 year bonds because these bonds’ yields were still more attractive than short-term ones, despite low liquidity.

Regarding to prospect for government bond auction results in the coming weeks, Vietcombank Securities’ report expected the gap between bidding rate and expectation (cut off rate) by the State Treasury would be narrowed resulting in significant improvements.