Investors are fleeing the equities market for safer haven fixed-income investments, preferring longer-dated perpetual bonds sold by state-owned banks, which pay a higher yield than similar-maturity government securities and popular mutual funds.
While these bonds were previously untouchables for investors following the RBI’s rescue of Yes Bank NSE -0.75 % and Lakshmi Vilas Bank NSE 4.79%, investors are now preferring state-owned bank bonds due to the improved financial health of select government-owned banks.
Perpetual bonds, also known as Additional Tier 1 in the market, have no fixed maturities but do have a five-year call option, which allows investors to exit. These are quasi-equity instruments, which are marketed as riskier investments with higher-than-average returns.
According to data compiled by JM Financial, perpetual bonds issued by Bank of Baroda, Canara Bank, and State Bank of India yielded 20-38 basis points less over the last three weeks, compared to a 12-basis point drop in the five-year sovereign benchmark paper.
“The falling yields reflect demand for those high yielding papers that were once considered untouchables,” said JM Financial managing director and head of debt capital market Ajay Manglunia. “As the stock market’s bull run comes to an end, wealthy individuals are looking for higher returns.”
“These five-year call option papers are considered shorter duration bonds,” he explained.
While AT1 securities are currently yielding 53-90 basis points more than a comparable sovereign benchmark, investors can earn up to 126 basis points more in terms of coupons payable annually or semi-annually. A basis point is equal to 0.01 percent of a percentage point.
On May 25, SBI papers with a coupon of 7.55 percent yielded 7.7%, compared to 8.08 percent on May 10. Similarly, Bank of Baroda (coupons 7.95-8%) and Canara Bank (coupon – 8.05%) yielded 7.95 and 8.07 percent, respectively, compared to 8.20 and 8.27 percent earlier in the period.