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
Secondary Bond Market
Foreign Exchange Market
I, Anirban Lahiri, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.VCSC and its officers, directors and employees may have positions in any securities mentioned in this document (or in any
related investment) and may from time to time add to or dispose of any such securities (or investment).VCSC may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment.Copyright 2013 Viet Capital Securities Company “VCSC”. All rights reserved. This report has been prepared on the basis of information believed to be reliable at the time of publication. VCSC makes no representation or warranty regarding the completeness and accuracy of such information. Opinions, estimates and projection expressed in this report represent the current views of the author at the date of publication only. They do not necessarily reflect the opinions of VCSC and are subject to change without notice. This report is provided, for information purposes only, to institutional investors and retail clients of VCSC in Vietnam and overseas in accordance to relevant laws and regulations explicit to the country where this report is distributed, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. Investors must make their investment decisions based upon independent advice subject to their particular financial situation and investment objectives. This report may not be copied, reproduced, published or redistributed by any person for any purpose without the written permission of an authorized representative of VCSC. Please cite sources when quoting.U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by VCSC issued by VCSC has been prepared in accordance with VCSC’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as “relevant persons”). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by VCSC in Australia to “wholesale clients” only. VCSC does not issue or distribute this material to “retail clients”. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of VCSC. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, VCSC will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between VCSC and the customer in advance. Korea: This report may have been edited or contributed to from time to time by affiliates of VCSC. Singapore: VCSC and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale.Pakistan: For private circulation only, not for sale.New Zealand: This material is issued and distributed by VCSC in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. VCSC does not issue or distribute this material to members of “the public” as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of VCSC. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. United States: This research report prepared by VCSC is distributed in the United States to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Decker&Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Decker&Co, LLC in the US shall be borne by Decker&Co, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if VCSC Broker or Decker&Co, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker&Co, LLC and VCSC is permitted to provide research material concerning investment to you under relevant legislation and regulations.