Vietnam’s local currency bond market posted the highest growth rate of the emerging East Asian region in the first quarter of this year, at 8.6% quarter-on-quarter, according to a report by the Asian Development Bank (ADB).

A person counts U.S. dollar banknotes in this file photo. Vietnam’s bond market sees highest growth in emerging East Asia 

The latest issue of the Asia Bond Monitor, titled “Emerging East Asian Local Currency Bond Markets: A Regional Update,” released late last month, reported that government bond yields in most emerging East Asian markets, including Vietnam, rose during the review period between March 1 and May 31.

“Emerging East Asia’s bond yields are trending upward, and the economic outlook remains positive,” said ADB chief economist Yasuyuki Sawada.

He added, “Countries in the region are well-placed to withstand external headwinds, including the general appreciation of the U.S. dollar associated with the strong growth momentum of the U.S. economy and the Federal Reserve’s interest rate hikes.”

Government bond yields on the rise

Vietnam’s local-currency government bond yields between March 1 and May 15 increased for all tenors, except for the one-year and two-year maturities, which fell 25 and 26 basis points, respectively.

In particular, yield increases for three-year to 15-year tenors ranged from six to 55 basis points, with three-year maturities showing the smallest gain and seven-year maturities, the largest.

Notably, the yield spread between two-year and 10-year bonds widened to 215 basis points from 146 basis points during the review period.

Since early this year, Vietnam has experienced a decline in its two-year yield, while its 10-year yield has trended upward, largely mirroring the trend in other markets.

The decline in yields at the short end of the curve can be attributed to the State Bank of Vietnam’s (SBV) reduction of its open-market operations interest rate in January, as the Vietnamese central bank cut the interest rate by 25 basis points to 4.75%. The move was intended to support economic growth by lowering bank lending rates.

On the other hand, since domestic investors are the major players in Vietnam’s bond market, the upward movement in the yields of long-term bonds reflects mounting pressure from rising global interest rates as the United States Federal Reserve and other major central banks prepare for accelerated monetary policy normalization.

In January, the SBV set its key monetary management policies for 2018 with a focus on maintaining economic stability by pursuing a proactive and flexible monetary policy. The central bank last cut its benchmark refinancing rate by 25 basis points to 6.25% on July 2017 to boost the economy’s lagging growth.

The Vietnamese dong has depreciated 0.3% against the greenback 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.

Local bond market sees highest growth

The size of Vietnam’s local-currency bond market reached VND1,173 trillion (some US$51 billion) at the end of March, though it remained the smallest market in emerging East Asia.

However, the country’s market posted the fastest growth rate of the region in the first quarter of this year at 8.6% quarter-on-quarter, an acceleration from the 2.7% quarter-on-quarter increase posted in the fourth quarter of 2017. On a year-on-year basis, the Southeast Asian nation also gained the highest annual bond growth rate at 17.2% year-on-year.

The strong growth is mainly driven by the surge in the issuance of central bank bonds that resulted in outstanding central bank bonds increasing more than threefold. Such bonds comprise some 94% of the total.

The SBV has been actively building up its foreign reserves over the last two years. One mechanism by which it can 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 SBV has been issuing central bank bills.

As a result, local-currency government bonds outstanding grew 8.9% quarter-on-quarter and 16.3% year-on-year to reach VND1,108 trillion in late March. Treasury bonds remain the key driver of the increase in growth of 5% quarter-on-quarter and constitute the largest share of total government bonds at about 75%.

On the other hand, State-owned enterprise bonds fell 11.2% quarter-on-quarter, following a quarter-on-quarter increase of 9.9% in the last three months of 2017, due to a large amount of maturities and no new issuance in the first three months of 2018.

Local-currency debt issuance from the government in quarter one this year totaled VND484.5 trillion, representing a 45.4% quarter-on-quarter increase, largely driven by the issuance of SBV bills, which amounted to VND435.1 trillion.

Treasury bonds also saw a dramatic increase in issuance in the January-March period. While the amount is far lower than the issuance of SBV bills, debt sales surged nearly sixfold to reach VND49.4 trillion during the quarter.

The size of the corporate sector’s bond market was valued at VND65 trillion at the end of March, growing 4.1% from the end of December and 34.9% from a year earlier. The slower growth in Q1 2018 compared with Q4 2017 was due to lower corporate debt issuance.

 SGT