Perpetual bonds are back in demand as investors shy away from equities

While these bonds were `untouchables for investors after the write-down of value in YES Bank and Lakshmi

when they were rescued by the RBI, investors are preferring these bonds issued by state-owned banks amid the improving financial health of select government-owned banks.

Perpetual bonds, known as Additional Tier 1 in market parlance, do not have any fixed maturities but generally have a five-year call option, an exit route for investors. These are quasi-equity instruments, billed as risker instruments that offer a higher-than-average rate of returns.

Over the last three weeks, perpetual bonds issued by , and yielded 20-38 basis points lower compared to 12 basis points fall in the five-year sovereign benchmark paper, data compiled by showed.

“The falling yields are reflecting demand for those high yielding papers, once billed as untouchables,” said Ajay Manglunia, managing director and head of debt capital market at JM Financial. “Wealthy individuals are now seeking higher returns as the bull run in the stock market looks over for now.”

“These papers with five-year call option are considered as shorter duration bonds,” he said.

While at the current yield levels those AT1 securities are yielding 53-90 basis points higher than the comparative sovereign gauge, investors can earn as much as 126 basis points higher in terms of coupons payable annually or semi-annually. A basis point is 0.01 percentage point.
papers carrying a coupon of 7.55 per cent yielded 7.70 per cent on May 25 versus 8.08 per cent on May 10. Similarly, Bank of Baroda (coupons 7.95-8 per cent) and Canara Bank (coupon – 8.05 per cent) yielded 7.95 per cent and 8.07 per cent compared with 8.20 per cent and 8.27 per cent earlier during the period.

With public sector banks improving their earnings in FY22 the fear of sticky loans has faded away. This has cut banks’ provision against bad loans raising their profits.

All collectively added to investor confidence according to Vikram Dalal, managing director, Synergee Capital

“Wealthy individuals are not finding any more juice in the stock market. They are now shifting parts of their allocations to perpetual bonds, sold by select public sector banks,” he said.

Those securities are available in the secondary market, offering an opportunity to earn from higher interest rates over a long time.

There is a general expectation of rate hikes. Hence, some investors are playing in the short term.

Most mutual funds too returned much lower than investor expectations in the last year. This too added to the appetite for perpetual papers.

Medium to shorter-duration funds yielded 2.91-3.49 in the past year, show data from ValueResearch, a mutual fund analytics company.