Fixed Income Report – October 2015

Fixed Income Report –  October 2015 |  Efforts to jumpstart bond issuance gain traction

Demand at bond auctions recovered as the Treasury finally nudged up winning yields for the 5Y tenors. The success ratio rebounded to 39% from last month’s record-low of 16%. Helping the effort was the strengthening of the VND by 0.5% since the end of Sep, following aggressive policy moves by the central bank to curb USD hoarding and speculation.

Through 9 months of 2015, G-bond issuance has reached only 42% of the 2015 plan. This has prompted the Ministry of Finance to seek government approval to resume issuing tenors of less than 5 years (a reversal of Resolution 78). The proposal is a bid to nudge banks, the main buyers of G-bonds to channel more short-term capital into these instruments. The vote will be taken up at the NA meeting in Oct where we expect it to be given the thumbs up given the urgent need to fund the fiscal deficit.

On the secondary market, currency stability was an assurance for foreigners, who net accumulated USD 183m over the past four weeks. But turnover declined 16% vs. one month earlier as capital continued to be directed to nurture credit growth (10.8% as of Sep 21, highest since 2011).

September price levels fell on drastic pump price cuts. The Sep print dropped 0.21% vs. Aug as a sharp fall in fuel prices easily offset the impact of compulsory tuition hikes. Given the current soft pace of price level increases, we further trim down our end of period 2015 inflation forecast to 1% from an earlier 3%.

Improvement in uptake on primary bond market. The Treasury raised the winning yield for 5Y G-bonds by 20 bps to 6.65% and bidders snatched up over 90% of the 5Y offerings in the latest two auctions. On the secondary market, foreigners were back to net buy positions with a focus on 1Y tenors, pushing down yield of this maturity. The yield curve steepened as yields of longer tenors stayed flattish over the past onemonth period.

Money market – the SBV was idle in the first two weeks of Oct. The central bank stopped injecting liquidity via OMO since the beginning of Oct, implying a net amount of VND 1.7t being taken out over the past one-month period. Meanwhile, outstanding T-Bills slid 16% without any new issuance so far this month.

Forex market – VND/USD rate cooled off on the SBV’s resilient policies to steady the Dong. On Sep 27, the SBV imposed 0% ceiling rate on USD deposits from corporates (non-FI), which had been standing at 0.25% for over two years. The cap on USD deposits for individuals was accordingly cut to 0.25% from the earlier 0.75%. The moves proved quite effective – the unofficial USD/VND retreated below the upper band for the first time since the Aug devaluation.

Shortly afterwards, the SBV issued Circular 15 to curb USD hoarding by forcing corporates (engaging in export-import activities) to shorten the time period between the date that they receive USD from a bank and the date that it makes USD payments to their trading partners. Since then, the Dong, traded at both commercial banks and on the unofficial channels, appreciated considerably and as of mid Oct, most banks were quoting the ask rate at 22,350 VND/USD compared to 22,510 two weeks earlier