Bond yield plunges ceaselessly on capital excess

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Interest Bond yield plunges ceaselessly on capital excessrates of government bonds issued by the State Treasury have dropped to new lows recently, forcing institutional investors to reduce their purchase volumes.

The 2-year bond interest rate dropped to a 5-year low of 5.58 percent per annum on April 28, two days before the long holiday.

Injecting money into government bonds was considered a wise move not so long ago. Commercial banks, which bought government bonds last year at 8-9 percent per annum, have made fat profits.

However, as financiers all say, savvy investing is all about the art of timing. It’s now too late to pour money into bonds.

The sharp decline of the bond interest rate, from 6.5 to 5.5 percent, is a consequence of the overly high injection of money into the investment channel, say analysts. Commercial banks, unable to find borrowers in the economic downturn, found it safest to stash their excess capital into bonds.

Many banks even took risks by borrowing short-term capital from the interbank market to buy long-term government bonds. In most cases, the dong interest rate in the market was one percent lower than the bond interest rate.

The 3-month interbank interest rate on April 21 reportedly was at 3.61 percent, while the one-year bond interest rate on the same day was 4.74 percent.

Observers say most credit institutions, including small banks, keep government bonds in their coffers. Medium-class banks are believed to hold VND15-20 trillion worth of bonds each. Meanwhile, the total bond value in the hands of the “big four” (Vietcombank, VietinBank, Agribank and BIDV) is in the hundreds of trillions of dong.

In fact, even though the bond interest rate has dropped to 5.6 percent per annum, injecting money into bonds is still not a bad choice, if noting that some banks now have to lend money at only 5 percent per annum to their loyal clients.

Though the bond interest rate is currently on the wane, bankers still can see the possibility of those rates going up. The head of the capital mobilization division of a joint stock bank predicted that the capital to be disbursed into bonds may shrink in the coming days, since banks are making great efforts to push up lending, because this is their main source of income.

However, it is not clear if they can do this, given that the capital demand is very weak. The lending interest rate has dropped from its high peak of 17-18 percent to 6-7 percent now. But the lending has not been improved.

A report of the State Bank of Vietnam showed that outstanding loans had increased modestly by 0.62 percent so far this year, while mobilized capital had increased by 3.09 percent. The problem is that bank capital has not headed for the production sector, but has mostly gone to the real estate sector: outstanding loans to real estate had grown by 3.95 percent.

TBKTSG

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