Research Center

In 43W23, interest rates in the money market generally cooled down as a massive amount of SBV’s bills matured. Specifically, VND73.80bn matured while SBV newly offered VND25.55tn, leading to a net injection of VND48.25tn into the banking system this week. The overnight interbank rate rose slightly by 33bps, and the 10-year government bond yield even dropped by 16bps. Similarly, the USDVND uptrend eased with a modest increase of 0.12% compared to the last trading date of 42W23. We predict that Vietnam's monetary authority will issue more bills in the coming weeks in the context that lending activities in October remained gloomy to keep the exchange rate stable. Hence, short-lived funding costs in the money market will likely be more expensive than in previous weeks.

Liquidity condition in the money market this week seems to be tight after a series of bill offerings, with the interbank rate for short tenors surging on the last trading day. ON, 1-week, 2-week, and 1-month rates rose by 89bps, 97bps, 95bps, and 65bps, respectively. Also, the trading and winning G-bond yields continuously rose, especially in the mid and long tenors, likely reflecting the rising yields environment returned.. With a dominating newly offering amount, SBV likely signals to the market participants that the balance point for short-term funding costs could be higher unless USDVND cools down significantly.

The money market experienced one more worrying week with USDVND increasing for the second consecutive week amid persistently negative USD-VND rate differentials and a strong DXY. SBV continued issuing bills to provide a channel for excessive liquidity when interbank rates dropped sharply. For the next week, SBV's VND20.00tn bills, issued one month ago, will start to mature. The actions taken by the central bank may reveal its short-term tendency to combat the exchange rate swing. If SBV decides to issue a more significant amount of new bills, it could indicate the commitment to stabilize USDVND, even if this decision leads to increased funding costs in the money market.

The effect of SBV’s liquidity withdrawal, through bill offerings, on the money market this week becomes more significant this week. Interest rates for short-lived tenors, ranging from overnight to 1-month, rose generally by around 80bps compared to last week. Similarly, 10-year and 15-year G-bond yields increased by 19bps and 16bps, respectively. However, the USDVND rebounded strongly due to a broad appreciation of the greenback following the intensified U.S. government bond sell-off.

The money market this week witnessed several corrections following SBV’s bill offerings. Interbank rates seemed bottom out with overnight and one-week tenors increasing by 15bps and 30bps compared to the end of the previous week, respectively. More relevantly, the interest rate for 1-month tenor halted the downturn and even popped up to 1.20% p.a. in some trading points. Similarly, the 10-year G-bond yield rose by 8bps with a 2-time-higher trading value, indicating a significant shift in the appetite of fixed-income investors. Notably, USDVND, the cause of recent SBV’s OMO practices as per our prediction, cooled down by 0.12% compared to last week. We predict the upward pressure on interbank rates to increase when SBV probably issues more bills.

SBV returned to withdraw money market through its Bill issuances this week, signaling that the central bank navigated its effort partly to stabilize the increasing exchange rate. It is worth noting that counterparties were excited to offerings with high participation (13 participants for each auction session) and relatively low winning yields (0.5-0.6% p.a.). This situation seems to reflect the liquidity excessiveness of the banking system. SBV’s decision likely originates from the upward pressure of USDVND that could endure due to the high import season and the persistent USD-VND rate differentials.

The money market held a silent tone this week, while the volatility in the FX market rose heading to the September FOMC next week. Overnight interbank rates stayed at nearly zero, representing excessive liquidity and slowing lending performance. USDVND renewed its upturn with a significant increase of 0.78% compared to last week. The persistence in negative swap spread and rising demand for import peak season may explain FX movement this week.

Interbank rates steadily stay at their lows when more announcements of lowering deposit rates are recorded. Although the aggregate loan balance returned to growth in August, the improvement was modest, partly causing the liquidity condition to be excessive further. In the vein of government support, the postponement of clauses 8, 9, and 10 of Article 8 of Circular No. 39/2016/TT-NHNN became effective in September. We expect SBV’s decision to ease a few requirements for borrowers and improve credit performance for the future months. The FX market is in the spotlight this week when the September FOMC is counting down. USDVND ended seven rallying weeks with a 10bps reduction compared to last week.

Although the aggregate loan balance returned to grow in August, the improvement was modest. Interbank rates remain cheap despite the long holiday, suggesting that the liquidity condition is persistently excessive and government policies in encouraging economic activities need more time to be material. In the vein of government support, the postponement of clauses 8, 9, and 10 of Article 8 of Circular No. 39/2016/TT-NHNN became effective in September. We expect SBV’s decision to ease a few requirements for borrowers and improve credit performance for the future months. In the notable development, USDVND rose further at a softer pace than the previous week primarily due to the prolonged situation of negative swap spread and higher demand for raw materials from importers to the peak season 2-3 months later.