Five-year bond yield seen rising this year

Hanoi (VNA) – Yields of Government bonds with terms five years or longer will likely rise this year, VPBank Securities said in a recent report.

The research said the G-bond market experienced its most successful trading in the fourth quarter of 2015 with bonds sold at auction at between 70 and 90 percent. The Government mobilised 131 trillion VND (5.8 billion USD) in the quarter, thanks to the 3-year bond supply and newly launched products from the State Treasury in December such as long-term bonds and zero-coupon bonds that sold at 100 percent.

The research said the sale of G-bonds was still growing from 2014 with a total issuance of 243 trillion VND (10.8 billion USD), up 2.8 percent in G-bonds and government-guaranteed bonds.

Despite good demand in the last quarter, the State Treasury, the largest G-bond issuer in Vietnam, failed to meet their target for the year. The State Treasury issued 196 trillion VND (8.7 billion USD), completing 51.2 percent of the year's target and a reduction of 7 percent from 2014. Of the bonds, 3-year and 5-year bonds accounted for the highest proportion of sales.

At the same time, most of the bond yields rose higher than they were in 2014. By the end of the year, yields on 5-year bond in the primary market was 18 basis points higher reaching 6.58 percent per year while the yield of the 10-year bond reached 6.95 percent per year, up 76 basic points and yield of 3-year bonds rose 55 basic points to 5.74 percent per year. As the only exception, yield of 15-year bonds fell 15 basic points to 7.65 percent per year.

VPBank Security thought that the yield increased due to low demand for bonds and the fluctuations in the exchange rate and it believed that yields will continue to rise, estimating that 5-year (and more) bond yields could reach between 7 and 7.3 percent this year.

The increase will be due to the large amount of the bonds offered to support the state budget. The National Assembly only approved the issuing of 3-year bonds, the most attractive bonds, to not exceed 30 percent of the total issuance volume, so the last 70 percent of the bonds will have a term of 5 years and more.

Most investors focus on 3-year bonds because of higher liquidity and lower risk, while the supply of longer term bonds was larger but demand for them was lower.

Meanwhile, downward pressure on the dong, the fear of a devaluation of the Chinese yuan and possibly more interest rate hikes from the US Federal Reserve System may make investors set aside a portion of their capital to hedge instead of buying local bonds.

Furthermore, local credit growth was expected to be as high as 18 or 20 percent while the banking system will continue restructuring activities in 2016.-VNA