When interest rates are low, the cogs of the high-interest corporate bond market will work smoothly and attract new investors. This shows that the risk of an overheated bull market rests on shaky ground.
Wave of withdrawals
A real storm appeared on the corporate bond market. Bond investment funds are struggling to find ways to meet the huge withdrawal demand from investors. This wave began to rise when Tan Hoang Minh’s batch of bonds was canceled, and the abuse of capital sparked a race to buy back bonds before the maturity date. Many investors purchased Tan Hoang Minh bonds through intermediaries and did not actually own the bonds. Consequently, individual investors are now confused and do not know who to contact or how to recover their capital. When this information spread, the need to withdraw capital from bond investment funds was also triggered.
It is difficult to know how much pressure to withdraw is really exerted, most funds trying to reassure investors as much as possible. Rarely during internal meetings do we hear the real facts, such as at the end of October between members of the Vietnam Bond Market Association (VBMA). Some representatives of the Bond Fund Management Company have admitted that on average over the two weeks since mid-October, bond funds have been withdrawn 2-3% of net asset value (NAV) per day.
Another fairly detailed statistic from Techcom Bond Investment Fund (TCBF), the largest bond fund in the market today, is that from September 30, 2022 to mid-November 2022, the amount of capital withdrawn from bond funds was d around 9,906 VND. billion. In this case, the most withdrawn amount was the TCBF fund with 6,359 billion VND, followed by the MBBond fund managed by MB Capital, worth 1,514 billion VND. The SSIBF fund managed by SSIAM also withdrew VND986 billion.
As early as mid-2020, the writer warned of a wild bond market that was getting bigger and bigger by the day. At the time, bank loan officers tried to convince ordinary savers, from small traders to retirees who had accumulated several hundred million dong, to buy corporate bonds.
With an issuance scale of hundreds of trillions of VND and growing from 2018 to the present, no middle organization can absorb it all. Individual corporate bonds are launched through the following process. First, the issuer sells primary packages to a few intermediaries. Second, these institutions subdivide bonds into derivatives or push them into bond funds. Third, banks, securities firms, and even issuers’ backyard firms try to reach out to depositors’ customers. Fourth, ordinary people are convinced to pay money to buy bonds.
When the deposit interest rate environment is low, persuasion becomes easy. The savings interest rate of only 3% to 4% per year is compared to the bond interest rate of 8% to 9% or even 12% per year in 2020, but the consultants intentionally forgot to mention the risk factors. Naïve savers are encouraged to buy bond investment fund certificates with a commitment offer to enjoy high and safe interest rates and withdraw cash at any time. Bond funds mobilize enormous resources because of these amateur investors.
Proof of this is that in the TCBF’s 2022 Q3 report, there were 20,443 investors, representing 46.73% of total fund shareholders, holding just under 5,000 fund certificates. This number represents 1.99% of the total number of certificates in circulation. Including the number of investors holding 10,000 certificates or less, 61.5% of shareholders hold only 5.77% of the fund’s value.
Simply put, the number of investors providing capital are tens of millions or hundreds of millions to billions of VND account for the majority of the fund. Another estimate raised at the VNMA meeting is that around 300,000 individual investors participated in the purchase of corporate bonds, including open-ended funds that receive entrusted investments via electronic platforms such as Finhay.
The interesting point is that when the corporate bond bubble burst the blame game started, with the fund representatives themselves at the VBMA meeting giving one of the reasons for the high outflow of capital from the funds bonds as the psychology of investors who were considering buying bond fund certificates as a savings deposit. This despite the fact that the Ministry of Finance has repeatedly warned that investing in corporate bonds is not saving.
However, investors still confuse these two basic concepts. The fact that amateur shareholders have realized that investing in bonds is risky, even if it means losing everything, they are now rushing to withdraw their money. This is a normal reaction and a legitimate act of self-protection. However, the drying up of bond funds at this time is inevitable.
The corporate bond market grew far too quickly, based on a majority of people who lacked sufficient information and knowledge, so the collapse was only a matter of time. If there are no shocks like the Tan Hoang Minh case or the tightening of the legal framework, this bubble will continue to expand in the years to come, and hundreds of trillions of bonds will be issued by brokers trying to defraud millions of ordinary people. The consequences of this will, in time, prove incalculably disastrous.