Macroeconomics Report - Modest pressure on low government bond yields
In 2019, the Vietnam State Treasury (VST) plans to issue VND 260 Tn (USD 11.2 Bn) worth of government bonds, up 30% YoY as bonds mature and the Treasury failed to complete its 2017 and 2018 targets.
Demand for government bonds remains high while the bid-to-cover ratio continued to decline (60% of the total offer) due to declining yields. The 5-year bond yields just 3.6%, lower than our expected inflation for 2019. Besides traditional bank buying, Vietnam Social Securities purchases helped lower yields. We think yields may have to pick up in 2019 in order to meet the Treasury’s plans.
Along with inflation, tightening bank liquidity will also put pressure on yields. We predict VGB yields may be flat in the second quarter and increase + 25-50 bps in 2H2019 although a possible reduction in reserve requirements may offset this somewhat. Moreover, as the Fed became dovish, other global central banks may follow.
Regarding the secondary market, we believe: 1) bank market liquidity will be tighter than in 2017-2018, 2) repos trading value will continue to rise as investors use it to mitigate risks and 3) foreign investors will net buy government bonds if the exchange rate (USD/VND) trades within a 3% range.
The corporate bond market grew strongly in 2018, reaching 8.6% of GDP and exceeding the 2020 target of 7% of GDP. We expect companies to issue more corporate bonds as bank credit tightens, especially in the real estate industry
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