Bonds, instead of shares and credit growth issue, are becoming the focus of the current monetary flow.
Since April 2010 as the Central Bank pumped more money every day into the open market operations (OMO), bond transactions have been more exciting. Statistics from Hanoi Stock Exchange (HNX) and Bloomberg firm showed that between March 29 and April 29 total bond trading value (according to par value) almost averaged at over 1.1 trillion dong (US$5.8 million) a week, even some weeks recorded 2.475 trillion dong.
After losing the threshold of 12 percent pa in Feb-March 2010, the coupon rate of bonds has been falling from 11.63 percent in April early to 11.13 percent pa in mid-May.
Not only enhancing trading on the market, banks and financial organisations also concentrated on purchasing government bonds in recent issue sessions. In State Treasury’s fifth-tranche bond issue on April 16, 2010, none of bonds were sold out because the coupon rate ceiling fixed by Ministry of Finance was low. But according to registration information, up to 22 institutions bid to buy 6.8 trillion dong of these bonds against the offering volume of 1.5 trillion dong only.
Till the sixth tranche issue on April 22, the institutions kept bidding a competitive coupon rate. Finally, the government raised total 4.030 trillion dong from 2, 3 and 5-year bonds.
In the latest issue (seventh) on May 12, despite the bond coupon rates continued declining, total bond sales value reached up to 4.525 trillion dong. Notably, the bidding volume surpassed five times than offering volume.
Now, not only the giants such as HSBC, Citibank, BNP Paribas, Bidv, Eximbank and Military Bank but also small sized banks and stock brokerages have joined the bond business.
Many small banks bid the low coupon rates and high purchase volume, namely South East Asia Commercial Bank (SeABank) buying 1.3 trillion dong of seventh tranche bonds and 300 billion dong of seventh tranche bonds, Petrolimex taking 200 billion dong of 7th tranche bonds, North Asia Bank with the purchase of 400 billion dong, and Maritime Bank 600 billion dong.
On May 13, the State Bank of Vietnam raised one trillion dong from two-year G-bonds at 11 percent pa and three-year bonds at 11.25 percent pa. With the high purchase demand like present, winning coupon rates of forthcoming G-bond issues will fall further.
The direct reason urging banks to enhance purchase of bonds is that they want to have “commodities” for transactions on the OMO where SBV pumped capital with the interest rate of 7-8 percent pa depending on terms of 7-28 days. The margin between the coupon rate of bonds and the OMO interest rate must be at least 3 percent pa, which is very attractive as for credit institutions while the gap between deposit and lending rate is only 1-2 percent pa.
SBV continued releasing policies to support the downtrend of coupon rates. In the week from May 10 to 14, the bank pumped total 14.481 trillion dong into the OMO market, higher two times than the previous week. Sources forecast that SBV could pump total 50 trillion dong a month within this May and June to bring the lending rate to 12 percent pa. Above forecast seems to be fundamental as viewing total money pumping of SBV in first half of May 2010.
Specialists predicted that Vietnam’s target to issue 56 trillion dong of bonds in 2010 can be reached more easily.
But in fields of bond business, banks will be forced to restructure assets, balance capital sources quickly and flexibly. Bonds are easy to be converted into cash (remittance) to ensure liquidity of banks if necessary and factually, bond business is safer than lending activity. But, not all banks are able to balance capital sources quickly and have timely reactions against the changes in macro-economic policies.
Small banks so far are usually less experienced in bond business. Through enhancing to buy bonds, they [small banks] can trade with SBV on the OMO market to have low-cost capital volume of dong to develop credit operations. They cannot compete with big sized banks in capital mobilisation while still have to suffer heavy pressure of profit targets.
As predicted till some times SBV’s money pumping into OMO will be only 2-3 trillion dong a week. At that time, capital of banks will be stagnant in bonds. Bond keeping of those banks with abundant deposit sources does not matter but small banks can do that because of small capital source. As need, small banks will have to sell bonds at high discount rate, which could lead to big losses.
In fact, the bond issue volume till now reaches only 20 percent of full year’s target. More importantly, banks and finance institutions should always have careful preparation to confront with macro changes in the monetary field.