State Bank champions bond development

With inter-ministerial Circular No. 106/TTLT-BTC-NHNN dated June 28, 2012, the Ministry of Finance (MoF) and State Bank decided that from August 24, Treasury Bills will be traded on the Hanoi Stock Exchange (HNX) secondary market. What are the main reasons for this decision?

The State Bank as the agent of State Treasury issued Treasury Bills to mobilise short-term capital through State Bank Operations Centre. Before issuing Circular 106, credit institutions and foreign bank branches used Treasury Bills mainly in transaction with the State Bank, only government bonds of more than one-month terms can be traded on secondary market.

Based on market development and demand, the MoF and State Bank acknowledged that allowing Treasury Bills traded on secondary market and HNX the only organiser will meet the investors’ demand as well as increase the liquidity of this monetary tool.

For the State Bank, Treasury Bills will be a safe additional tool for trading on the secondary market, especially for monetary transactions among credit institutions.  Then it will help to reconcile the capital as well as interest rates on interbank market.

For the MoF, Treasury Bills will become more attractive to investors as its liquidity is improved after being traded on secondary market. Thus, we can mobilise short-term capital easier by issuing this tool at better costs.

Thus, the MoF and State Bank both came to an agreement to let Treasury Bills be traded on secondary market, which will diversify investing tools, attract and encourage investors to invest in Treasury Bills, then increase the capital for the state budget, support monetary policies as well as enhance financial system stability.

When Treasury Bills are traded on secondary market, will capital mobilisation on primary market via this instrument be easier?

There must be many advantages in mobilising capital from Treasury Bills. Firstly, when Treasury Bills’ liquidity is improved, investors with redundant short-term capital will be more interested in this tool.

Secondly, besides being used in monetary transaction with the State Bank, Treasury Bills, when being traded on secondary market, can also be used in spot and repo transactions and mortgages. Thus credit institutions will be more flexible in trading with the State Bank and other partners.

Thirdly, management agencies will have a new product in the market, making it possible for them to diversify products, making policies and develop government bond market with the usage of both long and short-term bonds.

Therefore, using Treasury Bills on secondary market not only helps to develop a secondary market, but also the primary one.

The HNX is expected to construct a yield curve for the bond market to the year-end. What is the meaning of a yield curve in the State Bank’s controls towards the money market?

As far as I know, HNX is constructing a yield curve based on Svensson method. This method will limit the error in yield and price of short and long-term bonds, and reflect precisely the market movement.

Using a yield curve, not only investors, but also management agencies will have additional information and reference source in managing the market.

For the State Bank, such a yield curve will have positive impact on controlling the money market. With the figures of yield and maturity on government bond market, the State Bank will have reference source to calculate specifically and then issue the policy rates closed to movement of money market as well as open market operations. Interbank market interest rates will also be directly affected.

Allowing Treasury Bills to be traded on secondary market could be an evidence that fiscal policies are getting on well with monetary policies.  What is the next combination in policies between MoF and State Bank?

The State Bank, MoF and related agencies will coordinate to stimulate the development of government bond market in general and Treasury Bills in particular in coming time. Especially, we will focus on enhancing the government bond’s liquidity and attractiveness.

Firstly, we will stimulate activities to support the government bond payment, enable safe and quick payment, then enhance the attractiveness of government bonds. These will create favourable condition for government bond auction to be successful. Secondly, we will continue developing the bond market by using government bonds in money market operation as well as create favorable conditions for government bond transaction by innovating bond issuance, deposit, transaction and payment process.