Bond yields fall as dong crunch eases

Vietnam government bonds yields fell by as much as 300 basis points over the past week due to an increase in dong supply in the banking system and data showing a softening in the monthly pace of inflation, traders said.

Still, traders said the bond market would remain choppy until the end of the year because there could be another rise in policy rates, an uptick in August inflation after last week’s fuel price rise and broader uncertainty about funding.

“Everything looks calm,” one trader in Hong Kong said, referring to the inflation data and the dong markets.

“I still think it’s a choppy market until year end, so you will see a few weeks of rallies, then drops, then rallies,” he added.

July inflation is estimated to have hit an annual pace of 27 percent, the highest in almost 17 years, but the monthly pace of price rises in July at 1.1 percent was the smallest change since October last year.

Meanwhile, the central bank said in a weekly report on Monday it had been injecting up to VND10 trillion(US$600 million) per session via open market transactions in the past week to increase the supply of dong.

Dong supply had been extremely tight in June and through the first half of July as a result of the central bank’s policy tightening and a preference among local investors for the dollar.

Bankers said the central bank’s dong injection drove down overnight rates to around 14 to 16 percent from 20 to 21 percent a week ago.

Bond traders said market participants showed interest in buying one-year bonds at a 20 percent yield Monday, a fall from the 23 percent a week ago after the government increased retail gasoline prices.

Short-term yields had stabilized around 21 percent last week.

Meanwhile the central bank said this week it had injected sufficient dollar supply to commercial banks.

Last week, State Bank of Vietnam Deputy Governor Nguyen Van Binh told Reuters the central bank had not intervened in the currency market since early June.

Since the central bank had been selling dollars to defend the dong, the lack of its intervention also meant less dong was being withdrawn from the market.

“There has been no demand from commercial banks to purchase the dollar from the State Bank in the past week,” the central bank said in its weekly report on Monday.

“That shows the foreign exchange market has stabilized,” it said.

Dealers said the dong had stabilized around VND16,800 per dollar on the black market, up from 17,500 last Monday.

It was also traded around 16,800 in the official market.

Source: Reuters