Vietnam’s G-bond yields to enter a new low territory

20 government-bond auctions were held in August with about VND47.9 trillions G-bond amount being offered, which is approximately the highest level in 2021 (only lower than in May with VND48tn G-bond offering) and 45.1% higher than in July.

Unlike other financial markets that are facing enormous pressure from the outbreak’s impact, Vietnam’s fixed-income markets are re-taking their role as an investment shelter in this uncertain period. It is evident that the government bond markets are benefiting from increasing investment inflows.

Going into details, 20 government-bond auctions were held in August with about VND47.9 trillions G-bond amount being offered, which is approximately the highest level in 2021 (only lower than in May with VND48tn G-bond offering) and 45.1% higher than in July. Up to 92.2% of total G-bond offerings were long-term bonds with tenors greater than 10 years, in which 10-year and 15-year G-bonds accounted for about 73.4%. From the demand side, the total registering value also reached nearly its high in 2021, at VND135.7tn and 46.7% higher than in July, translating to a bid-to-offer ratio to its 3-month high of 2.83 times.

Under improved G-bond demand and expanding G-bond supply, about VND36.2tn were successfully issued, the second-highest level in 2021 and up 29.1% MoM, with 10-year and 15-year G-bond issuance accounting for nearly 80% of total issuance. At the same time, the bid-to-cover ratio improved to a 5-month high of 3.75 times, while the absorption ratio also remained high at 75.7%.

It is noticeable that G-bond yields for all tenors found their new record lows in August, in which 5-year yield dropped below 1% for the first time, and 10-year yield reached close to just 2%. More specifically, 5-year and 7- year yields were down by 14.5 bps and 7 bps from July to 0.92% and 1.25%. Long-term yields, including 10-year, 15-year, 20-year, and 30-year also dropped by 7 bps, 13.5 bps, 6.5 bps, and 5.5 bps to 2.09%, 2.30%, 2.85%, and 3.00%, respectively.

Kis Vietnam said that in contrast to a booming in the primary G-bond market, G-bond trading activity was slowing down somewhat in the secondary market, down by 25.6% MoM to just VND132.8tn. The G-bond trading structure was also changing markedly in August with a larger proportion of long-term bonds, in which 10-year and 15- year G-bonds accounted for the largest shares of 26.9% and 27.5% of total trading value.

By bond type, 97.0% of the total trading value (VND128.9tn) was from government bonds, while government-guaranteed bonds accounted for 3.0% of the total trading value (VND4.0tn). Regarding investor types, domestic investors made up 97.2% of total trading value, the remaining 2.8% was from foreign investors.

In Kis Vietnam’s view, current developments of the yield curve were closely linked to increasingly abundant liquidity conditions in the banking system. In a time of many uncertainties, deteriorated business conditions, and lack of investment opportunities, excess liquidity just found its way towards safe-and-sound G-bonds. The result is that G-bond yields were under massive pressure in this exceptional period.

Overall, the whole yield curve was shifted downward in the month, in which the curve went down faster towards its right tail, meaning longer-maturity G-bond yield dropped faster than short-term yields. To be more specific, very short-term yields, including 1-year and 2-year maturities, declined about 3.4 bps and 2.6 bps to 0.31% and 0.54%. Meanwhile, 3-year and 4-year yields dropped up to 15.9 bps and 18.9 bps to just 0.70% and 0.77%.

In the middle of yield curve, 5-year and 7-year yields fell the most by 21.8 bps and 15.1 bps to 0.84% and 1.20%. A right tail of the curve with long-term yields was also down by 2-digit points. 10-year and 15-year yields fell further by 12.4 bps and 17.7 bps to 2.06% and 2.28%, while 20-year and 30-year yields dropped 11.3 bps and 9.1 bps to 2.83% and 2.98%.

Kis Vietnam said that the current outbreak is considered a turning point towards a new prolonged period of low yields, which already started in June and accelerated in August. The fixed-income market is in a similar situation that is already experienced in the first lockdown last year. First, an era of cheap money has come back with interbank rates and G-bond yields suddenly plunging along with the worsening pandemic situation. Credit activity has also been freezing during the first months of the pandemic, which is the main cause of a free fall in interest rate levels.

Second, State Bank of Vietnam (SBV) has also created a new wave of liquidity into the banking system in different ways. While there were a hundreds of VND trillions flowing into banking liquidity via OMO operations, this time has also witnessed an equivalent amount of VND entering the system through USD-purchasing activity from SBV.

“A new period of “cheaper money”, or lower G-bond yield levels, has just started, and it would likely be continuing for a while, possibly several months, before reversing. How long it would last would depend significantly on the economic recovery in a re-opening phase. As long as credit activity remains subdued and the economy is dealing with stagnation, G-bond yields would continue to dive deeper into the low-yield territory”, Kis Vietnam stressed.