How to increase the attractiveness of government bonds?

The bìd-winning interest rate of government bonds continuously increased slightly. Photo ST.

The bid-winning rate is low due to the high tender offer

According to a Hanoi Securities Exchange’s report, in July 2018, the Hanoi Stock Exchange held 33 bidding sessions, mobilizing a total of 15.7 trillion VND of bonds, down by 6.9% compared to June 2018. Actual mobilization showed that the bid-winning value of the bid which is compared to the tender offer this month only reached 42.3%.

According to Mr. Nguyen Duc Hung Linh, Director of Analysis and Investment Advisory for individual clients, Saigon Securities Inc., (SSI), the winning rate is not high due to the high volume of tender offers. Since the beginning of June 2018, the State Treasury has continuously offered bids for all 6 terms with a volume of over 7,000 billion VND per session. Therefore, the winning rate only reached an average of below 50%.

On the other hand, the winning rate should also be considered on each term. The level of interest rate is still at its lowest level in many years, making the issuer prioritize for the mobilization of long terms. The evidence is that interest rates for 10 and 15 years are continuously pushing up from 2-3 points in each session. These two terms have the highest winning rates, 70% and 50% since April, respectively. Long maturities of 20 and 30 years have higher interest rates but difficult to issue. Short maturities of 5 and 7 years are not the priority of the issuer in this period, so the winning ratio is very low.

Adjust interest rates for supply-demand

Looking at the primary market for Government bonds recently, the market is no longer exciting as in the same period last year and tends to cool down. Explaining the reasons for this situation, Mr. Nguyen Duc Hung Linh said that the Government bond market cooling down is not due to the demand, it is because of interest rates.

“From the beginning of the second quarter, the trend of increasing the banks’ interest rates began to show clearly that it causes difficulties for the issuance of primary government bonds. Interest rates from both supply and demand sides did not meet, resulting in average winning rate of 50%. With predictions of bank’s interest rates continuing to increase in the coming time, in order to promote bond mobilization, the issuers are forced to raise interest rates,” said Mr. Nguyen Duc Hung Linh.

However, in the context of slow disbursement of government bonds, issuers have reason to not adjust the bond yields on the primary market closely following signals of the market, because mobilizing a large amount of Government bonds, but with slow disbursement will cause a heavy burden on the budget.

According to many economists, commercial banks are still the main investors in the government bond market, while at the end of the year, according to the business cycle, banks often increase their liquidity reserves to meet the high demand for credit growth. This makes the capital which is available to invest in government bonds in the large investment sector to be not as plentiful as the first half. The demand on the market reduces and that makes the ability to absorb Government bonds on the primary market to also decrease.

An investor said that if the State Treasury does not need large amounts of money, it may consider reducing the issuance value. The positive effect of this move is to create a psychological effect on the market, thereby contributing to reduce the expectations on bond yields of the market. At the same time, the State Treasury should consider adjusting the bond yield which is issued on the primary market in the direction of closely following signals of the market, thereby supply and demand meet.

On the other hand, the State Treasury should have clear and timely information to to help investors plan to actively participate in the market, avoid falling into the status of difficult to predict the operating signals from the current issuer.