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Buyers ignore Government bonds
The Government bond interest rate seems to have bottomed out when it dropped to 9.8 percent for three year term bonds at the bidding held on July 29, 2010. Analysts say the interest rate was so low that it cannot be lowered.
According to the Hanoi Stock Exchange, the volume of three-year bonds that institutions registered to buy was high at 4150 billion dong, but only 300 billion dong worth of bonds were sold. The bidding interest rate was the ceiling rate set by the Ministry of Finance.
The ministry is trying to gradually slash the ceiling interest rates for bonds issued recently. However, the interest rate decline has been pointed out as the main reason that makes bonds sell slowly.
Institutional investors did not register to purchase 10-year bonds. As for 5-year bonds, only 350 billion dong in bonds were sold. If comparing with the bidding on July 15, 2010, the interest rate of 5-year bonds increased from 10.3 percent to 10.4 percent.
While bond bidding has shown modest result, the issuance of guaranteed bonds is worse. No bond was sold at issues on July 20 and August 2.
While demand for bonds remains relatively high, investors have sent a clear message that they will focus on short-term bonds and will not accept low interest rates.
Ministry plans endangered
The slow sales have negatively affected the Ministry of Finance’s plans. The ministry wants to issue 100,000 dong worth of bonds in 2010, while only 40,000 billion dong in bonds have been sold in the first seven months. They have only four months to issue 60,000 billion dong worth of bonds, which is not an easy task.
Besides the low interest rates, many economic conglomerates and general corporations have issued short-term corporate bonds (12-36 months). They have been effectively competing with Government bonds because they have competitive interest rates.
Most recently, on August 16, 2010, Vinalines successfully sold 1000 billion dong worth of 3-year term bonds at 14.5 percent per annum for the first year. The floating future rates will be calculated by the 12-month term average deposit interest rates of banks plus 3.5 percent.
In the second quarter of 2010 alone, 10,000 billion dong worth of corporate bonds were issued. Song Da Corporation issued 1500 billion dong in corporate bonds at15 percent for the first year, Electricity of Vietnam (EVN) two trillion dong, Vinaconex 1000 billion dong, Saigon Securities Incorporated two trillion dong and Vincom one trillion dong.
A lot of listed companies also decided to issue bonds to obtain capital instead of issuing shares, because they fear a share oversupply. Some banks, including HCM City Housing Development Bank, BIDV, VP bank and Vietinbank, issued bills of exchange in June and July 2010 with coupon interest rates of between 12.5 and 13.5 percent.
No-win situation
Banks know that Government bonds have higher safety and can be used as mortgaged assets to borrow money on the open market. Despite these advantages, the low interest rates make Government bonds unattractive.
Why do enterprises need to issue bonds at high interest rates? There are two factors. First, banks think they need to set high interest rates to raise funds from the public. Second, after Vinashin was found to be bogged down in debt, the risk of corporate bonds has been set at higher levels.
According to Thoi bao Kinh te Saigon, some banks have decided on a temporary halt in bond purchases, because they do not need to make transactions on the open market regularly any more. Some banks have reported a capital excess, and yet it is not profitable to use these funds to purchase bonds.
The paradox of the moment is that, if the Government sets low rates for bonds, it will not be able to sell them. If it sets higher rates, it will not be able to ease lending interest rates.
vietnamet, TBKTSG
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