Research Center

A sustained low-rate environment in the fixed-income markets continued to a greater extent as interbank rates and G-bond yields plunging further. However, phenomenal lending growth recently, and likely continue in the near term, will put massive upward pressure on the interbank rates and short-term yields in January.

Excess liquidity in the banking system, due to a slowdown in bank lending, has been driving interbank rates and G-bond yields to historic low levels, of which some rates have stayed near-zero level for a long time. However, a surge in credit growth in November may give an early signal that liquidity conditions in the banking system would not as easing as before, which could reverse a super low-rate environment in the fixed-income markets.

In October, interbank rates and bond yields continue to stay at historic lows as the current liquidity condition remains abundant. Looking forward to November, in the scenario that lending activity accelerates under the favorable seasonal effect in the fourth quarter, we expect interbank rates and G-bond yields to pick up from the bottom.

Recent monetary easing decision from SBV is expected to maintain the interbank rates at a low base in 4Q20. In the context of cheap liquidity flooding to banks and lending activity remaining sluggish, demand for Vietnam G-bonds was rocketing to an all-time high in the primary G-bond market. Looking forward to October, we expect the interest bank rates to remain stable at low levels, while abundant liquidity will put further downward pressure on G-bonds from 5-year to 15-year tenors.

Recent developments in the interbank market and G-bond markets continue in August as interbank rates and G-bond yields remain extraordinarily low. Subdued credit growth, from our view, is the main factor behind that downward trend. We maintain our view that these ultra-low interest rates would be reversed if the first lending market started to pick up.

Sluggishness in banking lending activity excites participants in the money and G-bond markets due to high uncertainties in the business conditions. As a result, interbank rates and bond yields continued to stay low along with increasing trading activities. We predict that the situation will continue to happen in the next month until the first lending market picking up.

The fixed-income securities markets currently are overflowing with excess liquidity as short-term government bond yields and interbank rates find their record lows. However, a strong increase in the credit growth in June, from our perspective, indicated that part of surplus liquidity was being withdrawn from the banking system, which in turn could reverse the current trend.

We see an easing path of monetary policy as SBV not only pauses the liquidity withdrawal in the open market but also lowers short-term rates in several funding markets, according to the Decision 418/QĐ-NHNN 2020. Short-term interbank rates reacted quickly to this decision when dropping to near all-time low levels, while short-term bond yields also fell off after the rate-cut signal.

From our viewpoint, SBV’s intervention of withdrawing liquidity out of the banking system in early April was considered a temporary liquidity adjustment rather than a long-term tightening monetary stance. On the other side, G-bond yields were back to its downward momentum in the month, showing market participants are fleeing to safe-haven assets amid the economic turmoil due to the COVID-19 pandemic.