Local newspaper reported 3 point policy statement from the PM last weekend during a conference held by Ministry of Planning and Investment. First point is monetary policy that includes the following key measures:
- first priority is inflation control. PM says although inflation is cooling off but Vietnam can not be complacent
- Monetary policy will be gradually loosen with target to have short-term interest rate "closed" to pre-crisis levels. Banking system will be monitored and support if needed, the government will not allow "instability" in banking system.
- State-owned banks are key to support businesses during turbulent times.
Let's take a look at the short-term rate target.
SBV have already cut based rate 3 times since Oct 2008, and short-term 1 month interbank level is currently around 10.20% as compared to a range of 8% to 10% during Feb and Mar 2008 when I personally think qualified as "pre-crisis" period.
Currently, market participants are expecting another cut in based rate by the end of 2008 to 10% (based rate is 11% at the moment) and almost factor in the level in local money market. My guess is that 1 month interbank offer rate would hover around 8% to 10% by year-end.
Now, how would it impact local government bond yield. Looking at the chart of yield curve. Obviously the current inverted yield curve should continue to normalized but it is unlikely that we will see the same steepness of "pre-crisis" as the 1yr to 3yr part of the curve was artificially low during 2006-2007 period due to lack of liquidity in both primary and secondary markets.
Lots of market participants view that government bond yields should go back the the level of 7 to 8% soon. Well, in my view, probably not because :
- Excess cash at local banks could, in the short-term push government bond yields lower, but local banks (especially State-owned banks) are required to extend credit to support businesses together with worsening loan quality of banking system, this short-term cash surplus will probably be depleted soon.
- With FII backing off from risky assets in general and "bad experience" on Vietnam local fixed income trades, we would expect this type of investor stay side-line for a sometimes.
- Negative carry (different between short-term money market funding vs bond yield) are widening and if rate cut expectation reduce, demand for local government bonds might be diminishing.
So my guess is in the medium term, government bonds yield should stabilized around 10% level for 3 to 5yr tenor.
- first priority is inflation control. PM says although inflation is cooling off but Vietnam can not be complacent
- Monetary policy will be gradually loosen with target to have short-term interest rate "closed" to pre-crisis levels. Banking system will be monitored and support if needed, the government will not allow "instability" in banking system.
- State-owned banks are key to support businesses during turbulent times.
Let's take a look at the short-term rate target.
SBV have already cut based rate 3 times since Oct 2008, and short-term 1 month interbank level is currently around 10.20% as compared to a range of 8% to 10% during Feb and Mar 2008 when I personally think qualified as "pre-crisis" period.
Currently, market participants are expecting another cut in based rate by the end of 2008 to 10% (based rate is 11% at the moment) and almost factor in the level in local money market. My guess is that 1 month interbank offer rate would hover around 8% to 10% by year-end.
Now, how would it impact local government bond yield. Looking at the chart of yield curve. Obviously the current inverted yield curve should continue to normalized but it is unlikely that we will see the same steepness of "pre-crisis" as the 1yr to 3yr part of the curve was artificially low during 2006-2007 period due to lack of liquidity in both primary and secondary markets.
Lots of market participants view that government bond yields should go back the the level of 7 to 8% soon. Well, in my view, probably not because :
- Excess cash at local banks could, in the short-term push government bond yields lower, but local banks (especially State-owned banks) are required to extend credit to support businesses together with worsening loan quality of banking system, this short-term cash surplus will probably be depleted soon.
- With FII backing off from risky assets in general and "bad experience" on Vietnam local fixed income trades, we would expect this type of investor stay side-line for a sometimes.
- Negative carry (different between short-term money market funding vs bond yield) are widening and if rate cut expectation reduce, demand for local government bonds might be diminishing.
So my guess is in the medium term, government bonds yield should stabilized around 10% level for 3 to 5yr tenor.
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