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Government bond no longer safe shelter for investors
One year ago, when the stock market began falling, some investors breathed a sigh of relief as most of their money was injected in government bonds, considered the safest securities. However, the shelter has become shaky and even dangerous in the context of banks continuing to increase interest rates.
Since the end of May 2008, short-term government bonds (less than two years) have been traded at high rates of return of 25% or 30%, while longer-term government bonds (five years and more) at 14-16%.
Investors are trying to sell bonds as they see interest rates skyrocketing and the VND decreasing in value. Bonds with the face value of VND100,000 are now being transacted at VND75,000-80,000/unit.
Nowadays, investors are not purchasing government bonds to enjoy the interest rate of 9% per annum and the low liquidity of bonds, they are making bank deposits to enjoy the interest rates of 8% per annum (for demand deposits) or 18-19% per annum (for fixed-term deposits) and the higher liquidity of deposits.
That explains why government bonds are selling at low prices, and why investors who previously purchased government bonds are suffering losses.
Investors now have to offer attractive discount rates in order to sell the bonds, especially as bank interest rates are expected to increase further.
Investors who purchased bonds with their own money are under no pressure to sell bonds to get money to pay debts. However, they have been making minus profit considering the inflation rate and bank interest rates.
This is really a bitter pill for banks, which use mobilised capital to invest in government bonds. One year ago, it seemed reasonable to mobilise capital at 8% per annum to invest in bonds to get the interest rate of 9% per annum. However, the situation has become quite different now as banks have to mobilise capital at the interest rate of 18-21% to enjoy the interest rate of 9% per annum.
In early June 2008, when the State Bank of Vietnam raised the basic interest rate to 14% per annum, the discount rates of 2-3-year term bonds increased dramatically.
A lot of investors who feared that the bank interest rate could increase to 25% per annum pushed the discount rates up. In some cases, bonds were transacted in big lots at VND65,000/bond.
The high discount rates proved to promise attractive investment deals for individual investors, especially as the stock market still does not show any signs of recovery. However, as the bonds were sold in big lots, worth tens of billions of VND, individual investors let the opportunities pass. Finally, foreign banks took the bonds with high rates of return.
At the end of June 2008, when the stock market became less bleak, the rate of return reduced to 20%.
The information that the State Bank of Vietnam will ask commercial banks to give explanations if they apply interest rates of higher than 17.5% per annum has made people believe that the prices of government bonds will increase.
Nevertheless, government bond transactions have unexpectedly become bustling again since early last week with the rate of return up again. The main suppliers are foreign investors, who, analysts say, are ‘more sensitive than necessary’ to any sign of market interest rate changes.
VNN
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