Upward pressure on bond yields

The credit-deposit imbalance is widening to an unsustainable level that is putting massive pressure on banking deposit demand.

In Kis Vietnam’s view, there are important forces from macro developments in the reopening behind that tightening trend, although the State Bank of Vietnam (SBV) still holds an easing stance towards monetary conditions in 2022–2023. Those driving forces are described in more detail below:

Firstly, credit growth is accelerating during the reopening phase faster than any previous period, and the credit-deposit imbalance is widening to an unsustainable level that is putting massive pressure on banking deposit demand (which could be solved by interbank deposits or real deposits). This factor would continue to create more and more pressure on interest rate conditions in the future, if credit continues to outpace deposits in the fast economic recovery.

Secondly, VND money supply from SBV’s unsterilized USD-purchasing tool is stuck due to a large deficit in the current account in the first quarter, which is tightening further banking liquidity against accelerating credit growth. Kis Vietnam expects this factor to remain short-lived due to the seasonality (Tet’s long holiday limit s trade activities and FDI), and it will expectably reverse later.

Thirdly, government investment remains slow during the first quarter, and we have reasons to believe the majority of the government's funding resources are currently held at SBV, not in the banking system. If this resource could be poured into the economy via the banking system (through government spending), it could help ease the current bank liquidity strain. Kis Vietnam expects this to gradually happen from the second quarter thanks to the government's efforts (easing procedures for the government's infrastructure investment).

Besides, there are also other factors affecting interest rate conditions via either (1) inflationary pressure imported externally from surging commodities prices from geopolitical developments (Russia-Ukraine war) and worsened goods-supply conditions from logistics congestion and global bottlenecks; (2) inflationary pressure domestically resulting from the reopening phase, particularly from a part of the services sector; and (3) current global sentiment towards faster-than-expected tightening monetary conditions affecting domestic G-bond developments. Under the current global and domestic macroeconomic conditions, those factors are likely to favor less-easing interest conditions in the fixed income markets in the near term.

It is evident that the rapid credit growth causing an increasingly widening credit-deposit imbalance is currently a dominating force in setting the landscape of interest rate conditions and bond yields in the current and near future. Kis Vietnam expects two things to stop the upward pressure on interest rate conditions (and bond yields): (1) a significant amount of VND inflows into the economy from possible sources such as current account surplus and SBV continuing to accumulate foreign reserves or the government accelerating its spending in the near term; and (2) credit growth could slow down in the near term in the context that the government is signaling to allot more credit.

From Kis Vietnam’s view, the liquidity strain in the money markets may continue to last for a couple of months before other developments begin to take place and dominate the interest rate conditions. Therefore, the upward pressure from short-term rates will continue to spread to bond yields in the short-term, medium-term, and long-term. Short-term and medium-term yields may continue to increase quickly with high volatility, while longer-term yields will feel the pressure right behind them.