Vietnam's bonds drop as funds withdraw on devaluation concern

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Vietnam's five-year government bonds fell this week, driving the yield to the highest level in more than a month, on speculation overseas investors are withdrawing funds to guard against a further devaluation in the dong.

The central bank devalued the currency last month for the first time since 2011 by weakening the reference rate by 1 percent, effective June 28. The fixing has since remained unchanged at 21,036 per dollar, while the dong has dropped 1.1 percent over the past month. Maybank Kim Eng Joint-Stock Co. forecasts another 2 percent to 3 percent decline before year-end, analysts Michael Kokalari and Hang Vu wrote in a July 3 note.

"Foreigners continued to withdraw from the Vietnam market due to the fear of a further dong devaluation," said Nguyen Duy Phong, a Ho Chi Minh City-based analyst at Viet Capital Securities Co.

The yield on the five-year securities jumped this week by 25 basis points, or 0.25 percentage point, to 8.3 percent, a daily fixing from banks compiled by Bloomberg shows. That was the biggest increase since the five days ended June 14 and the highest level since May 21. It rose 18 basis points today.

The dong fell 0.2 percent this week to 21,238 per dollar as of 3:30 p.m. in Hanoi, according to data compiled by Bloomberg. The currency is allowed to trade as much as 1 percent on either side of the central bank's daily fixing rate.

The currency traded between 21,530 and 21,620 in the unofficial market in Hanoi today, compared with a range of 21,370 to 21,450 at the end of last week, according to an information service run by state-owned Vietnam Posts & Telecommunications.

Vietnam's trade deficit and the large gap between local and world gold prices, which has encouraged illegal smuggling, are putting pressure on the dong, Maybank Kim Eng analysts wrote in the research note. Vietnam may post a trade shortfall of $9 billion this year, the Ministry of Industry and Trade said July 1. That compares with a surplus of $284 million in 2012, according to preliminary figures from the General Statistics Office.

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