Vietnam Money -Bond yields fall as dong crunch eases

HANOI, July 28 (Reuters) - Vietnam government bonds yields fell by as much as 300 basis points in the past week because of an increase in dong supply in the banking system and data showing a softening in the monthly pace of inflation, traders said.

Still, traders said the bond market would remain choppy until the end of the year because there could be another rise in policy rates, an uptick in August inflation after last week's fuel price rise and broader uncertainty about funding.

"Everything looks calm," one trader in Hong Kong said, referring to the inflation data and the dong markets.

"I still think it's a choppy market until year end, so you will see a few weeks of rallies, then drops, then rallies," he added.

July inflation is estimated to have hit an annual pace of 27 percent, the highest in almost 17 years, but the monthly pace of price rises in July at 1.1 percent was the smallest change since October last year.

While the bond market took some comfort in the lower-than-expected monthly inflation, traders braced for a jump in August inflation after last week's steep 31 percent hike in petrol prices. Economists have warned annual inflation could cross 30 percent.

Meanwhile, the central said in a weekly report on Monday it had been injecting up to 10 trillion dong ($600 million) per session via open market transactions in the past week to increase the supply of dong.

Dong supply had been extremely tight in June and through the first half of July as a result of the central bank's policy tightening and a preference among local investors for the dollar.

Bankers said the central bank's dong injection drove down overnight rates to around 14 to 16 percent VNIBOR= from 20-21 percent a week ago.