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Government bond market issues
It is estimated that US$15bil worth of government bonds are now in circulation, of which foreign investors hold $3bil. The bonds held by foreign investors were purchased in the period of between 2007 and the first quarter of 2008.
The prices and interest rates
According to the Bond Business Forum, which gathers domestic and foreign investors, government bond prices are decreasing rapidly, which means the sharp increases of bond yield.
Do Ngoc Quynh of the forum said that three months ago, people who purchased two-year term bonds could enjoy the bond yield of 7.4%, while they now can enjoy the bond yield of 20%, which means that the bond has become 30% cheaper.
Analysts say that as the government bond is losing its value, the government will find it difficult to raise funds in the time to come. This will also affect the capability of businesses to issue bonds.
If the government has to borrow money at 20%, businesses will have to borrow money at over 20%. If so, businesses will not think of mobilising capital by issuing bonds anymore.
As such, if the government wants to mobilise capital at this moment, it will have to pay an interest rate higher than that offered by commercial banks, now at 17-19%, despite the low risk of government bonds.
High bond yield, why?
It has been asked what factors have pushed up the government bond yield to such high levels and whether this reflects the real situation of the national economy.
To answer this question, analysts say that the inflation rate by the end of May 2008 had reached over 20% over the same period of last year, and over 15% over the beginning of 2008. In order to ensure positive real interest rates for bond holders, the bond yield needs to increase.
However, analysts say that the biggest pressure comes from the sale to foreign investors. This may originate from their bond trading habits. Foreign investors consider bond transactions’ positions every day, and if they see losses from the bond deals, they will sell the bonds to stop losses and escape from the market if the losses hit certain levels.
The sale by foreign investors has brought about disadvantages to the market as foreign investors’ offered prices do not accurately reflect the bond price index of the Vietnamese market.
Settlement needed
The Bond Business Forum recently held a working session with the Ministry of Finance and State Bank of Vietnam to find solutions to the current problems of the government bond market.
Participants suggested that if the government does not want to see the capital mobilisation channel closed, it should take urgent measures to interfere in the market, possibly by buying back bonds from foreign investors, to release them from the pressure of selling to stop losses. Of course, this is just a temporary measure, but it still can help prevent the bond yield from further increasing.
However, experts have warned that if the government intervened in the market, this would cause other side effects. For example, investors will convert the money they get from selling bonds into US dollars.
The experts have warned that if the government cannot mobilise capital on the market, businesses will also be unable to mobilise capital for production and investments as bank doors and stock market doors are now closed to them.
VNN
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