Vietnam's three-year government bond prices hit a 13-month high on Monday as falling interest rates and solid liquidity encouraged buyers, mostly domestic banks, to invest in the bond market.

The three-year yield dropped 0.0034 percentage points to its lowest level since April 2015 while the five-year yield also fell to near 12-month low.

"Money supply has been abundant as the central bank buys more U.S. dollars after last year's stress, dragging bond yields to record lows," said fixed income analyst Dinh Huyen Trang of Vietcombank Securities.

In 2015, Vietnam devalued its dong currency , three times, and widened the dollar/dong trading band twice to help protect exports.

The one-year yield rebounded slightly by 0.1083 percentage points on Monday after hitting a 14-month low late last week.

Average overnight interbank interest rates eased to 0.6 percent from 0.78 percent in the previous session, extending a slide from a year high of 5.78 percent hit in February.

The one-week rate edged up 0.03 percentage points after hitting the lowest level this year, of 1.12 percent, on Friday while the one-month rate stayed flat at the year low of 3.2 percent, Reuters data showed.

Demand for Vietnam's government bonds picked up this year, with the country, as of May 26, managed to raise nearly two-thirds of its 220 trillion dong ($9.81 billion) domestic bond sales target, finance ministry's data showed.

Successful issues could be a boon to the tightening state budget that saw public debt soaring to 64 percent of gross domestic product, just below the 65-percent limit.

The central bank on Friday allowed domestic and foreign commercial banks to use more short-term funds to invest in government bonds.

"This policy will have positive impacts on the bond market by expanding the investing scale and numbers of buyers," said Trang.

Fixings of Vietnamese bond yields are calculated daily by Reuters, using bid and ask yield rates contributed by both foreign and domestic banks prior to 0400 GMT. ($1=22,428 dong) 

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