Bonds Drop, Yields Rise to 19.9%; Dong Halts Decline

Viet Nam's five-year bonds fell for a second day as banks raised interest rates on deposits after the central bank raised borrowing costs this week to slow inflation at more than 25%. The dong halted a three-day decline.

Accelerating consumer price rises in Asia increases the risk of higher interest rates and lower earnings, HSBC Holdings Plc said today, as oil trades near a record high. Vietnamese banks raised returns on deposits to as much as 19.2% from the average rate of 15% before yesterday, Tuoi Tre newspaper reported today.

``Investors are selling debt because they see the high inflation rate and a decline in the value of the dong,'' said Nguyen Thu Hong, head of treasury department at the Ho Chi Minh City-based Saigon Securities Inc. ``High interest rates banks are offering to lure dong have pushed up bond yields.''

The yield on the benchmark five-year bond rose 42 basis point, to 19.93%, the highest since at least July 2006, according to a daily fixing price from 10 banks compiled by Bloomberg.

The State Bank of Viet Nam lifted the base rate to 14% yesterday from 12%, the third increase since the beginning of the year. Banks can now charge borrowers up to 21%. Viet Nam's inflation accelerated to 25.2% in May, the fastest rate in 16 years.

The currency was at 16,620.50 per dollar as of 4 p.m. in Hanoi, according to data compiled by Bloomberg.

The dong yesterday slumped 2% after the State Bank lowered its reference rate to 16,461. The State Bank set today's rate at 16,458 per dollar. Banks are allowed to trade the currency up to 1% on either side of this rate. (Bloomberg)