Since credit growth has been strictly capped at 20 percent and interbank rates have fallen sharply, large lenders need an investment vehicle for their capital, he said.

And as banks begin to pour money into the bond market, bond yields have continued to fall, he said.

An auction in Hanoi on June 16 attracted solid demand. The treasury offered VND3 trillion worth of three-year and five-year notes, but investors sought to buy up to VND11 trillion.

The bonds were sold at the same yield of 12.30 percent. That was the lowest rate since a sale on April 21, according to Bloomberg. In a previous auction on June 9, the treasury sold five-year debt to yield 12.65 percent and three-year securities at 12.70 percent.

Economist Le Tham Duong said many banks with surplus money have been “stuck” because of the credit growth limit. While the stock and forex markets are caught in difficulties, government bonds have become a safe haven for banks, he said, noting that the bonds carry no risks and can be easily sold later or used as collateral for loans.

Good sign

Economists said recent declines in bond yields, together with low and stable interbank rates, are the first signs that banks will gradually lower their interest rates. However, where the interest rates are headed also depends on inflation and the government’s monetary policies, they added.

A central bank weekly report late last week said interest rates on dong loans ranged from 16.5 to 25 percent per year.

“When inflation cools, the central bank will aim to reduce interest rates, using both monetary and administrative measures,” State Bank of Vietnam Governor Nguyen Van Giau said at a press briefing on June 17. “But during these difficult times, businesses have to accept lower profits and try to cut input costs to ease the credit burden,” he said.

Inflation is expected to drop this month, experts say. Prices in both Ho Chi Minh City and Hanoi have been stable of late.

Duong said bond yields will continue to fall, and if inflationary pressures keep easing as expected, interest rates will go down.

“I think monetary policies are now on the right track and some positive results have been achieved,” he said. “But it’s necessary to prevent weak and small banks from breaking credit rules so that public and investor confidence can increase.”

The central bank last week ordered all commercial banks to respect a deposit rate cap of 14 percent. Local media reported that many banks have been offering 17-18 percent on dong deposits.

Giang of the Vietnam Bond Market Association said considering that some banks actually have surplus cash, it’s necessary to separate them from the others.

“The central bank needs to identify banks with liquidity problems and deal with them separately. When other cash-rich banks do not have to worry about competing with smaller banks for clients, they will lower their interest rates.”