Interbank interest rates declined further as liquidity remained high. Although credit grew by a strong 9.06% in H1 2017, from the end of 2016, liquidity in the banking system has remained high due to slow disbursement of allocation and capital for basic construction investment (state expenditures for investment and development completed only 23.3% of the FY2017 target in 5.5M 2017).
Bond yields should remain low in coming weeks due to lack of supply pressure and high liquidity in the bank system. Credit growth, which has risen at a slower pace recently (according to SBV statements), has partly helped to elevate liquidity in the interbank market and reduce interbank interest rates during our May 15 – June 16 review period. However, we believe credit growth will regain strong momentum, especially in the last quarter of the year, as it usually does.
Bond demand weakened because of strong credit growth in 4M 2017, the absence of G-backed bonds and the long holiday at the beginning of May. From April 17 to May 12, the State Treasury successfully auctioned VND18.1 trillion (USD797.4 million) on the primary market, but with a lower winning rate (72.1%) than in the previous period (81.1%) due to weaker bond demand, especially in the first three weeks of the reviewed period.
Several factors caused interbank interest rates to remain high for the first three weeks of the reviewed period. Interbank interest rates stayed high at 4.5%-4.7% from the beginning of the reviewed period on March 20, but started to drop slightly from April 12. Strong credit growth increased demand for VND capital in interbank market and reduced liquidity in the banking system during the period. Funding needs to pay for imports, which grew 24.9% YoY in 3M 2017,
Continued strong demand resulted in high winning rate of 91%.From February 20 to March 17, VND29 trillion (USD1.3 billion) of G-bonds and G-backed bonds were successfully auctioned on the primary market. Strong demand led to a high winning-to-offering ratio of 91.3% in the reviewed period across all tenors. 5Y bonds became less attractive as its yield remained low in the reviewed period. However, longer tenors continued to attract more demand.
Bond issuance rebounded strongly thanks to high liquidity in the banking system. VND28.2 trillion (USD1.24 billion) of G-bonds and G-backed bonds were successfully issued, more than seven times higher than the VND3.82 trillion (USD169 million) of bonds sold during the previous reviewed period. The winning rate for this reviewed period also increased to 76.3%, much higher than the 20.8% level recorded in the previous period.
Bond mobilization picked up in the second week of 2017 after a few weeks of sluggish issuance due to the completion of 2016’s issuance target. The government successfully raised a large amount of capital (VND316.7 trillion) from bond sales in 2016 thanks to strong bond demand, with a winning rate of 76% caused by high bank liquidity.
Primary bond supply and demand remained low during reviewed period. Primary bond supply fell sharply as the government reached its full-year bond issuance target. Tightening bank liquidity caused by higher corporate capital demand for payments and production at the end of the year weakened bond demand, resulting in a low winning rate of 44% from mid-November to mid-December.
G-bonds supply dropped significantly, but high liquidity in the banking system helped the State Treasury to uphold a weekly average winning rate of 76%.Yields of G-bonds in the primary market were stable from the previous reviewed period, with 10Y and 20Y yields sliding slightly, while yields of other tenors remained unchanged. Supply of government-backed bonds was more than four times the previous period. However, only VND2.53 trillion (USD113 million) of government-backed bonds were
The primary market shifted focus from short-term bonds to long tenors with 30Y bonds occupying more than half the total offering amount. Primary bond supply declined sharply while bond demand still stayed very strong due to high bank liquidity.