Government bonds play a critical role in financing national development and ensuring macroeconomic stability. In Vietnam, however, the effectiveness and resilience of the government bond market are constrained by a narrow and highly concentrated investor base, raising concerns about market functioning and the sustainability of the government’s financing strategy.

Domestic institutional investors—primarily the Vietnam Social Security (VSS), insurance companies, and banks—dominate the market. The VSS alone holds around 40 percent of outstanding government bonds and accounts for over 80 percent of its investment portfolio as of end 2024. In contrast, other investors collectively represent less than one percent of local currency government bonds.

This high degree of concentration reflects both limited domestic investment alternatives, and until recently, regulatory restrictions that prohibited overseas investments by the VSS. Prior to the enactment of the Social Insurance Law (Law 41/2024), which takes effect on July 1, 2025, the VSS was not permitted to invest overseas. Such reliance on a small number of institutions exposes the market to heightened concentration risks and amplifies vulnerability to policy or behavioral shifts among key investors.

More importantly, the lack of investor diversity is rooted in structural weaknesses in market pricing and design. Government bond yields are mispriced and uncompetitive, drawing interest mainly from those mandated by regulation. Yields on 10-year bonds—the most preferred tenor—hover around 3 percent—negative in real terms and below bank deposit rates and the central bank’s policy rate. Even more strikingly, bonds with maturities longer than 15 years offer lower yields than shorter tenors, distorting the yield curve and discouraging long-term investment. Such pricing sends misleading signals about risk and demand, and deters new investors, and weakens overall market functioning.

Market depth and liquidity remain limited. With most government bonds held to maturity by large institutional investors, secondary trading is thin and confined to outright transactions,  while repurchase activity remains underdeveloped. The absence of bonds with maturities under five years—discontinued since 2017—further restricts participation by investors with shorter investment horizons and constraints the availability of instruments needed for active trading.

Investor demand has weakened noticeably. The government issued VND 371.5 trillion bonds until the end of 2025, and the average bid-to-offer ratio was just 0.8, down from 1.3 the previous year. Demand was particularly weak at the long end of the curve, with investors bids covering less than half of the issuances for maturities exceeding 15 years. If sustained, such weak demand risks undermining the stability of government financing in the future.

Vietnam’s financing needs are set to rise sharply as the government targets double-digit economic growth. Meeting these needs through revenue mobilization alone is unrealistic, given that the current tax system and administrative capacity have not kept pace with the scale and ambition of economic expansion. This places greater pressure on domestic debt markets to shoulder a growing share of public financing.

Continued heavy reliance on the VSS is also unsustainable. Under Law 41/2024, VSS is now permitted to rebalance its portfolio toward higher-yielding foreign assets. Against the backdrop of rapid population ageing and concerns over VSS’ long-term viability, any sustained pullback from domestic bonds could significantly disrupt the market and heighten funding risks.

The path forward

Addressing these challenges will require decisive action to strengthen demand and enhance the resilience of the government bond market.

First, bond yields need to be more competitive and aligned closely with market conditions. While administratively low yields help contain borrowing costs in the short-term, persistently rejecting higher-yield bids—reflected in a 65 percent winning-to-registering ratio as of the December 2025—discourages broader participation. Offering yields that adequately compensate for risk and duration would help attract a broader and more diversified investor base, including foreign institutional investors that will be crucial for meeting future financing needs.

Second, reintroducing short-term government bonds at market-appropriate yields would broaden the investor base and improve market liquidity. Instruments that cater to risk-averse and small investors would deepen secondary market activity, expand the supply of high-quality collateral for repurchase transactions, and help complete the yield curve across maturities. A more continuous and well-functioning yield curve would also provide a stronger pricing benchmark for other fixed-income instruments, supporting broader capital market development.

Finally, modernizing the monetary policy framework would reinforce these reforms. More frequent and transparent communication from the State Bank of Vietnam—including regular disclosure of open market operations—would enhance transparency and predictability, help anchor investor expectations and encourage broader participation in the government bond market.

Conclusion

Expanding and diversifying the investor base in Vietnam’s government bond market is essential to meeting the country’s growing financing needs and supporting its long-term development objectives. The current heavy reliance on a narrow group of domestic institutions, particularly VSS, is neither resilient nor sustainable. By allowing yields to better reflect market conditions, reintroducing short-term instruments, and advancing monetary policy transparency, Vietnam can build a deeper, more robust government bond market—one capable of serving as a stable foundation for its ambitious economic trajectory.