Bond Demand Ramps Up

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Silicon Valley meets Saigon

May 04, 2016

Broad-based fall in yields as demand ramps up

Vibrant uptake at recent auctions, fuelled by cash built-up in the banking system, pushed the winning 5Y yield to its lowest level since June 2015 while the 3Y hit its low since its re-issuance in November 2015. We believe yields will not go lower from here as banks are about to divert capital for growing their loan books.

Year-to-date, the Treasury has completed 71% of their 1Q16 issuance plan and 24% of the full-year plan. Given the current pace of bidding, it is likely that 1Q16 target will be in reach.

Trading on the secondary market was also buoyant with yields falling significantly across most tenors as banks were sitting on surplus cash after Tet holiday while foreigners continued favoring fixed-income instruments. Yet, as
credit growth resumes and inflation is on the rise, we expect yields to tick up in the weeks ahead.

Primary market – Busy auctions after Tet holiday pushed down winning yields along the short end. The bid-to-cover ratio in the final two weeks of February jumped to 2.5x from 1.5x one month earlier, and the Treasury succeeded in offloading VND39 trillion (USD 1.7 billion) of G-bonds to the market (tripling vs. one month earlier). Investors’ appetite was particularly strong for 3Y and 5Y instruments, and hence, winning yields of these short tenors declined 20-25 bps. We believe that yields have bottomed and banks would hesitate to bid for lower yields since they could start allocating their capitals to the private sector. As such, we expect winning yields will
steady at the upcoming auctions.

Secondary market – Yield curve steepened on robust demand. Weekly trading volume in the final two weeks of February reached the highest level since August 2014 thanks to ample liquidity in the banking system. However, demand showed some signs of cooling down in the first two weeks of March presumably, as loan growth resumed, leading yields of all tenors up slightly after hitting 8½ -month lows at of end of February. We believe investors may start taking profits and yields will nudge up across all tenors during the remainder of March.

Foreigners were still on a net buy orientation over the past four weeks, injecting a net VND3 trillion (USD133 million) during the past four weeks and VND4.9 trillion (USD218million) year-to-date. Positive draft amendments to Circular 36 which relax regulations on foreign banks holding G-bonds encouraged this group to increase their participation in the market. Moreover, a stable dong has so far helped boost confidence in G-bonds.

Money market – The SBV reversed to a net withdrawing position. The overnight interbank rate plunged 400 bps in the second half of February (<1.5% as of end-February) but quickly bounced back to circa 4% as of mid-March when bank lending activities heated up liquidity demand. However, the pickup in liquidity demand was within an acceptable range as it coincided with a withdrawal of VND189 trillion (USD8.4million) by the SBV over the past four weeks, pushing total reverse repos outstanding down 80%.

Forex market – Strong foreign flows supported the dong. The trade surplus came in at nearly USD700 million for 2M16 coupled with resilient FDI disbursement of USD1.5billion (+15% vs. 2M15) provided firm support for the dong. We continued seeing healthy foreign investment in March and hence expect the dong to remain steady against the USD towards the end of 1Q15.

The mandatory hike in healthcare prices will pressure inflation in March. February CPI rose 0.42% on-month and 1.27% on-year, mainly due to increasing consumption for the Tet holiday. We forecast price levels to go higher in March, driven by the new pricing mechanism for 1,800 types of healthcare services starting from March 1.

Primary Bond Market

vietnam primary bond market hanoi stock exchange

vietnam primary bond market hanoi stock exchange hnx

auction result

Secondary Bond Market

vietnam secondary bond market

vietnam Foreign Buying and Selling

Money Market

vietnam Interbank Overnight Rate

vietnam Open Market Outstanding

Foreign Exchange Market

vietnam foreign exchange market

CDS Market

vietnam cds market


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