Fear of rising inflation has pushed the yield on Vietnam’s 5 year treasury bond to 11.541%, according to Bloomberg. What does a 11.5% yield mean? It means that if you buy a bond for $100, every year you’ll get about $11.50 back in return. Compared to the US yield of 2.3%, it sounds like a good deal, right? Well, it depends on your outlook on Vietnam in the next 5 years.
Bond Basics (*Skip if you’re a banker, read if you need a finance refresher)
A bond is just a fancy name for a loan. The treasury bond is a loan to the government. Other institutions like cities and corporations can sell bonds, too. When you buy a basic bond, you loan the seller your money and you get money back in return. That’s your yield.
A bond, like any other debt, has value, since you get a return (yield) every six months for as long as you own that bond. However, the value of your bond changes as interest rates go up and down. Specifically, when interest (and inflation) rises, the value of your bond decreases. Why? For example: you buy a bond from Coca Cola that gives you a return of 5% a year. All of a sudden, interest rises and your bank is offering everyone 10% interest to deposit in their bank, risk free! Your money, mean while, is stuck with Coca Cola at a measly 5% return.
In summary: interest/inflation up, bond value down.
Should I Let Vietnam Borrow $100 and get $11.54 in returns each year?
A 11.5% yield is incredibly high. At that return, you can double your money in less than 7 years. At the same time, inflation is even higher. In January, Vietnam’s inflation was measured at 12.17%. That means for your money to even maintain its value in Vietnam, you have to have a 12.17% return.
A five-year yield at 11.5% is an inherit bet that at one point, interest and inflation in Vietnam will slow down well below the 12.17%. Buying the bond will secure the 11.5% return for the next five years.
The decision is ultimately counterintuitive. If you think Vietnam will continue to grow at a breakneck pace, don’t buy the bond, since interest and inflation accompanies fast growing economies. If you think Vietnamese will settle down, buy the bond and secure the high yield rate as interest goes down.
I’m generally bullish on Asia so I would not put my money into bonds right now. The better investment would be stocks, if you understand the environment. There’s a lot of room for growth, but Vietnam’s market is not exactly efficient. That’s a discussion for another day. Until then, read on bulls and bears.
Yo James,
Watch out now. You’re buying 11.5% yield bond in USD, so you’re gaining $11.50 annually for that $100 bond. That double-digit inflation of 12% is only applicable to VN Dong. So 11.5% yield is a pretty good deal for your US dollars since inflation for USD is only 2-4% annually.
If you were talking about 11.5% yield bond in VN Dong currency then your analysis is probably more fit. However, the section title “Should I Let Vietnam Borrow $100 and get $11.54 in returns each year?” is not suggesting that.
Thanks Neil, you’re right, it should be in VND. I use dollars in the example for simplification. It gets complicated if we’re talking about buying VN bonds with USD and converting the returns back to USD; you’ll have to add in sovereign risks, exchange risks, and factor in gray/black market conversion.
Glad to know another Neil Nguyen out there. haha.
It’s not about quantity, it’s about quality; and I am the one with quality! haha
Smarter Neil,
I’m not a banker so maybe you can help me understand this a little bit better. Assuming yield stays constant, are you saying it’s possible for me to buy Vietnamese bonds with an 11.5% yield (using US dollars) and get a net gain of 7.5%-9.5% (subtracting away US inflation) for my investment?
TD,
I was trying to say it is not possible to do that because the 11.75% yield rate only applies to VN Dong, but James’ article was implying that the yield rate of 11.75% is applicable to USD. He corrected himself in his comment that he was just using USD figure for the shake of simplicity in writing.