Vietnam's local currency bond market in the first quarter posted the region's fastest growth rate at 8.6% quarter-on-quarter (q-o-q), an acceleration from the 2.7% q-o-q increase posted in the fourth quarter of 2017, according to a recent report by the Asian Development Bank (ADB).
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The size of Vietnam's LCY bond market reached VND1,173 trillion (US$51 billion) at the end of March, registering growth of 8.6% q-o-q and 17.2% year-on-year (y-o-y), stated the ADB's report on LCY markets in emerging East Asian.
While the government and corporate bond segments both saw increases in Q1 2018, growth in the LCY bond market is largely driven by government bonds, which comprise about 94% of the total. Despite the strong growth, Vietnam's bond market remains the smallest in emerging East Asia, according to the report.
The result was mainly driven by the surge in issuance of central bank bonds that resulted in outstanding central bank bonds increasing more than threefold. The State Bank of Vietnam (SBV) has been actively building up its foreign reserves over the last two years. One mechanism by which to do this is the purchase of foreign currencies in the market with Vietnamese dong.
To manage the resulting excess liquidity from the additional Vietnamese dong released into circulation, the State Bank of Vietnam has been issuing central bank bills. Vietnam's stock of Treasury bonds also rose during the quarter.
Consequently, LCY government bonds outstanding grew 8.9% q-o-q and 16.3% y-o-y to reach VND1,108 trillion (US$48.2 billion) at the end of March, while Treasury bonds remain the key driver of the increase in growth of 5.0% q-o-q and constitute the largest share of total government bonds at about 75%.
The report showed that LCY debt issuance from the government in Q1 2018 totaled VND484.5 trillion (US$21.1 billion), representing a 45.4% q-o-q increase, largely driven by issuance of SBV bills, which summed to VND435.1 trillion (US$18.9 billion).
The government plans to mobilize VND200 trillion (US$8.7 billion) of government bonds in 2018 for its state budget, with an emphasis on long-term maturities and keeping the interest rate low. The government may, however, adjust the volume of bonds and their structure in line with market conditions.
Rising investor confidence in Vietnam's market
Between March 1 and May 15, LCY government bond yields in Vietnam increased for all tenors except the one-year and two-year maturities, which fell 25 basis points (bps) and 26 bps, respectively. Yield increases for three-year to 15-year tenors ranged from six bps to 55 bps, with three-year maturities having the smallest gain and seven-year maturities the largest. The yield spread between two-year and 10-year bonds widened to 215 bps from 146 bps during the review period.
The decline in yields at the short-end of the curve can be attributed to SBV's reduction of its open market operation interest rate in January when the central bank cut the interest rate by 25 bps to 4.75%. The move was intended to support economic growth by bringing down bank lending rates.
On the other hand, since domestic investors are the major players in Vietnam's bond market, the upward movement in yields of long-term bonds reflects mounting pressure from rising global interest rates as the United States Federal Reserve (Fed) and other major central banks prepare for accelerated monetary policy normalization.
In January, the Vietnamese central bank set its key monetary management policies for 2018 with a focus on maintaining economic stability by pursuing a proactive and flexible monetary policy. The SBV last cut its benchmark refinancing rate by 25 bps to 6.25% on July 10, 2017 to boost the economy's lagging growth. The Vietnamese dong has depreciated 0.3% against the United States dollar year-to-date through May 15.
The stability of the dong is being supported by a healthy balance of payments; high growth of investment inflows due to an improved investment climate; and the continuous buildup of foreign reserves by the SBV, which have recently hit record highs. These factors have also contributed to rising investor confidence in the Vietnamese market.
