Local currency government bond yields in Vietnam climbed for all tenors between March 1 and May 8, according to the Asian Development Bank’s (ADB’s) latest issue of the Asia Bond Monitor.
The ADB noted in the report that bond yields rose faster at the short end than the long end, resulting in a flattening of the yield curve. Yields gained an average of 30 basis points (bps) for the 1-year through 3-year maturities but only rose an average of 6 bps for the 10-year through 15-year tenors.
As a result, the spread between the 2-year and 10-year yields narrowed to 125 bps on May 8 from 150 bps on March 1.
The overall upward trend in bond yields was influenced by the uptick in deposit rates. Some banks raised deposit interest rates at the beginning of the year to enable them to attract funds for mobilisation.
A regulation by the State Bank of Vietnam (SBV), which came into effect in 2019, reduced the ratio of short-term capital that can be used for long-term lending. Only 40 percent of a bank’s short-term capital can now be used for long-term lending, down from the previous allowable amount of 45 percent.
This led borrowing costs to edge higher. The uptick in bond yields at the short end of the curve can also be attributed to rising inflation expectations.
Upward adjustments in the prices of electricity and gasoline in March and April were expected to have a domino effect on the cost of goods and services.
While inflation in the first four months of the year was the lowest for this period in three years, core inflation crept up to 1.8 percent year-on-year (y-o-y) in the January-April period, hitting the upper end of the target range of 1.6 percent-1.8 percent set by the legislative National Assembly for full-year 2019.
On the external front, uncertainties in global financial markets, particularly those arising from the unresolved trade issues between the United States and China, also affected bond yields. These two markets are among Vietnam’s largest trading partners.
The SBV has kept its refinancing rate steady since July 2017 at 6.25 percent and continues to utilise other monetary tools in guiding interest rates.
The central bank has also engaged in open market operations and intervened in the foreign exchange market to stabilise the dong to US dollar exchange rate. Between March 1 and May 8, the dong weakened by 0.7 percent versus the US dollar.
Real gross domestic product (GDP) growth in Vietnam eased to 6.8 percent y-o-y in the first quarter (Q1) of 2019 from 7.5 percent y-o-y in Q1 2018 as growth moderated in all major industry types.
The largest contributor to overall GDP growth was the industry and construction sector, which grew 8.6 percent y-o-y in Q1 2019. The services sector expanded 6.5 percent y-o-y, and the agriculture sector grew 2.7 percent y-o-y in Q1 2019.
Drop in G-bonds
Vietnam’s local-currency bond market reached a size of VND1.193 quadrillion (US$51 billion) at the end of March. Growth rose a marginal 0.7 percent quarter-on-quarter (q-o-q) in Q1 2019, a reversal from the 5 percent q-o-q contraction in Q4 2018. On a y-o-y basis, however, a 0.2 percent contraction was recorded.
Total local-currency government bonds outstanding stood at VND1.092 quadrillion at the end of March, with growth rebounding to 0.9 percent q-o-q in Q1 2019 after contracting 6.1 percent q-o-q in the preceding quarter. On a y-o-y basis, the government bond market contracted 2.4 percent after expanding 7.9 percent in Q4 2018.
The stock of treasury instruments was the sole driver of growth as the stocks of central bank bills and government-guaranteed and municipal bonds contracted during the review period.
At the end of March, the outstanding amount of treasury bonds reached VND919.2 trillion, accounting for an 84.2 percent share of the government bond stock. Growth of treasury instruments rebounded to 2.3 percent q-o-q and 9.0 percent y-o-y. In Q1 2019, newly issued treasury instruments totalled VND78 trillion on issuance growth of 123.4 percent q-o-q and 20.5 percent y-o-y.
The outstanding stock of central bank bills stood at VND4.9 trillion, as the SBV resumed issuance in March after a five-month break. The stock of government-guaranteed and municipal bonds stood at VND168.2 trillion, down 8.5 percent q-o-q and 9.0 percent y-o-y.
Rise in corporate bonds
At the end of March, the outstanding stock of local-currency corporate bonds reached VND100.7 trillion, with growth declining 1.3 percent q-o-q but rising 31.9 percent y-o-y.
The 30 largest corporate bond issuers in Vietnam accounted for an aggregate bond total amounting to VND96.2 trillion. This was equivalent to 95.5 percent of the corporate bond total at the end of the review period.
Taking the top spot was housing developer Vinhomes with outstanding bonds amounting to VND12.5 trillion, followed by Masan Consumer Holdings with outstanding bonds of VND11.1 trillion. Together, these two firms accounted for 23.4 percent of the total corporate bond stock at the end of March.
In the third spot was Vietnam’s largest property developer Vingroup with outstanding bonds valued at VND9.6 trillion, followed by the Vietnam Commercial Bank for Industry and Trade (VND8.2 trillion) and the Asia Commercial Bank (VND6.8 trillion).
