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Interest rates in the money market remained high this week as the thirst for short-term liquidity was unresolved. SBV has reduced its support to the banking system with a lower 7-day repo offering than the previous week. Besides, spot USDVND backed to approach SBV’s selling price as DXY returned to its uptrend with the strong release of the U.S. labor market.

Interest rates in the money market have surged amid the liquidity turmoil after SBV implemented multiple measures to reduce the interest rate spread between USD and VNVD loans. The overnight interbank rate has exceeded the discount rate of 2.50%, and SBV switched to a competitive auction method to quickly absorb the high demand for short-term liquidity. On the other side, USDVND has eased as the greenback globally weakened as other central banks, especially the ECB, were willing to catch up with the Fed in the interest rate race to tackle escalating inflation.

Short-term funding costs return cheaper following SBV’s tightening of credit quality. Accordingly, the selling pressure of government bonds on the secondary market has eased. However, we predict that the cheap short-term cost situation was temporary under potential growth in the first lending market.

Although the credit growth still outperformed the deposit growth in April, the liquidity pressure in the money market to meet regulatory ratios has eased, mainly attributed to the significant decreases in short-term interbank rates. April also witnessed significant selling pressure in the government bond market amid higher inflationary pressure and foreign government bond yields. We predict that this development of the fixed income market will continue in the next month.

In March, the liquidity strain in money markets, caused by increasingly widening credit-deposit imbalance, continued to be a dominating force behind a reversal of super-easing interest-rate conditions towards pre-pandemic normal levels. Interbank rates are anchored nearly the ceiling levels, while bond yields continue to suffer increasingly upward pressure in the new-normal conditions. Looking forward, we expect the upward pressure from short-term rates to continue to spread to bond yields in the short-term, medium-term, and long-term. Short-term and medium-term yields may continue to increase sharply with high volatility, while longer-term yields would feel the pressure right behind them.

The early months of 2022 witnessed a big shift in the overall interest rate conditions across the fixed-income markets, including the interbank rates and bond markets, from around record-low levels on the way back to pre-pandemic levels. Although the upward pressure is lasting longer than our expectation, the nature of some of the pressure is characterized as short-lived and is expected to be fading out in the coming months.

In January, during a high liquidity demand period, surging interbank rates continued to put upward pressure on fixed-income markets. Developments in the post-Tet period this year are also abnormal with liquidity tension yet to be eased. Looking ahead to February, from our view, tightening liquidity conditions in the banking system, combined with widening mismatch in credit-deposit growth and accelerating economic recovery pace, would put more upward pressure on the government bond yields.

In overall, the corporate bond market was quiet in Oct 2020. Issuing value dropped by 35% compared to Sep 2020. Accumulated 10M20, about VND357tn worth of corporate bonds were issued, up 26% YoY as well as corporate bond rate has increased slightly in 2020