Perpetual bond yields move up 25-35 bps

Suresh P Iyengar Mumbai | Updated on March 16, 2021

As uncertainty over SEBI valuation norm hovers

The yields on perpetual bonds floated by banks have moved up 25-35 basis points in the past two days following the SEBI circular on valuation of mutual fund investment in these bonds and the subsequent Ministry of Finance letter directing SEBI to withdraw the circular.

The MF industry has invested about ₹35,000 crore in perpetual bonds of banks with tenure of 100 years.

The top four mutual funds alone hold 80 per cent of the investment in these bonds.

Last week, SEBI directed mutual funds to value the perpetual bonds as a 100-year instrument and limit investments to 10 per cent of the assets of a scheme.

According to SEBI, these instruments could be riskier than other debt instruments.

Mahendra Jajoo, CIO - Fixed Income, Mirae Asset Mutual Fund, said the yields will further move up by 50-75 basis points if SEBI retains the circular without any changes, as there is nervousness and uncertainty over the regulator’s next move.

Though the investment cap prescribed by SEBI is absolutely fine, the net asset value (NAV) of schemes holding these bonds will come down if yields firm up further, he added.

Risk profile

SEBI has a valid point in restricting the mutual fund investment in these perpetual bonds as the Employees’ Provident Fund Organisation and insurance companies including LIC, which manage long-term money of investors, do not invest in these bonds due to its risk profile, said an analyst tracking mutual fund investments.

Moreover, some short-term debt schemes have also made huge investment in these perpetual bonds, breaching their investment mandate and putting investors’ money at risk, he added.

The RBI had recently allowed a complete write-off of ₹8,400 crore on AT1 bonds issued by YES Bank as part of a bailout package led by State Bank of India.

Perpetual bond prices fall if yields firm up, and the NAV of the schemes which hold these bonds will go down. Mutual funds will be forced to sell other debt paper to meet the redemption pressure.

Subsequently, the quantum of investment in AT1 bonds of these schemes will move up and test the 10 per cent cap imposed by SEBI. It is a sort of double whammy and needs to be dealt with immediately, he said.

Published on March 16, 2021

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