Vietnam bonds gain most in two years on inflation

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Vietnam's benchmark five-year bonds on Friday rose by the most in almost two years as slowing inflation bolstered speculation the central bank will cut interest rates. The dong was little changed.

Yields declined to an 11-month low as consumer prices climbed 16.44 percent in February from a year earlier, the least in 10 months, the General Statistics Office said in Hanoi Friday. The central bank said last month it may reduce borrowing costs to "more suitable" levels. Vietnamese Prime Minister Nguyen Tan Dung said in a Dec. 6 speech that the government expects the pace of price increases to slow to about 9 percent in 2012.

"I would expect the refinancing rate to be cut by 50 or 100 basis points, sometime in March or April," Fiachra MacCana, managing director at Ho Chi Minh City Securities Corp., said. "I don't think a 10 percent inflation rate for the year is realistic, but about 12 percent is. It will dip into single-digits mid-year and then climb back out again."

The yield on the five-year notes fell 34 basis points, or 0.34 percentage point, on Friday to 11.91 percent, according to a daily fixing from banks compiled by Bloomberg. That was the biggest drop since March 4, 2010 and the lowest level since March 30, 2011. The rate declined 32 basis points this week.

In February last year, the government released its so-called Resolution 11 strategy to tame prices, restrain credit growth and stabilize the currency. The state bank could cut policy rates next month, Hong Kong-based HSBC Holdings Plc economist Trinh Nguyen wrote in a note to clients on Friday.

Dong steady

Vietnam's central bank raised several policy rates last year as it sought to tackle the fastest inflation in Asia. It cut the repurchase rate for the seven-day term to 14 percent from 15 percent on July 4, after increasing it in nine steps from 7 percent at the start of November 2010. The monetary authority also raised the refinancing rate from 8 percent to 15 percent between November 2010 and October last year, and boosted the discount rate to 13 percent on May 1, after raising it from 7 percent to 12 percent on March 8.

The dong was little changed on Friday and for the week at 20,840 per dollar as of 5:23 p.m. in Hanoi, according to prices from banks compiled by Bloomberg. The State Bank of Vietnam fixed its daily reference rate at 20,828, according to its website. The currency is allowed to trade as much as 1 percent on either side of the rate.

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