Commercial banks have made a volte face, refusing to buy government bonds because the offered interest rates are lower than their expected levels.
Government bond sales have been selling more slowly because commercial banks, the biggest bond buyers, have turned their back on the bond issuances.
According to Vietcombank Securities and the Hanoi Stock Exchange, the value of bonds issued on the primary market in June 2013 was VND11.456 trillion, a sharp decrease of 52.7 percent over the same period of the last year, the deepest low since November 2012.
The interest rates decreased continuously in the period from September 2012 to May 2013. In the first five months of 2013 alone, the interest rates reduced by 2-2.17 percent, which was equal the interest rate reduction in the whole year 2012. The interest rate just witnessed a light recovery in June 2013, according to Vietcombank Securities.
“Cold” and “gloomy” were the words the securities firm used to describe both the primary and secondary bond markets last month.
Tong Minh Tuan, Head of the Analysis Division of Vietcombank Securities, said the market has been quiet partially because of the foreign investors’ move of withdrawing capital from newly emerging markets, including Vietnam, after the US FED decided to scale down the QE3 package. Besides, the financial crisis in China has also affected the bond demand.
In June 2013, according to Tuan, the foreigners’ net sales of bonds reached VND5 trillion in value.
In fact, the demand for government bonds remains high, especially when big banks have profuse capital. However, the investors expect higher interest rates, according to Tuan.
Ngo Minh Hoa from Bao Viet Securities has also noted that the amount of government bonds issued has been on the decrease. Though the number of investors registering to attend the bids remains high, the number of investors successfully buying bonds is modest.
Hoa believes that commercial banks and insurance companies would only buy government bonds if the interest rates reach the expected levels.
Banks once rushed to buy bonds in the first months of the year, when the interest rates were high. Meanwhile, they thought the interest rates would decrease towards the end of the year.
“The bond market is always more bustling in the first months of the year,” Hoa noted.
In general, at the beginning of years, the bond issuers themselves cannot anticipate the market performance in the year. Therefore, they tend to issue bonds in high quantities at the beginning of the year, and then adjust the volume of bonds to be issued in the next months after considering the market at different moments.
Analysts believe the secondary market would be more bustling in the second half of the year, when banks need capital to provide loans to businesses, and they would have to sell bonds for money.
Tuan also thinks the bond market would warm up in the time to come, because the credit growth recovers slowly in the third and fourth quarters, while the banks’ liquidity is strong. Meanwhile, the bond supply is expected to be profuse, since huge capital is needed to fund government’s projects.
Short term bonds, 2-3 year bonds, would be the most favorite, according to Tuan, because bond holders fear long term risks.