Perpetual bond yields see sharp rise on mutual fund selling

MUMBAI: Monday’s trading session wasn’t for the faint hearted – regardless of asset class. Stocks were roiled for much of the day while bonds – of the perpetual variety – were pummelled, stretching for their investors a nerve-jangling ride that began last week after a regulatory fiat on valuing these debt instruments.

On a day India’s producer price index surged unexpectedly and the shadow of rising US bond yields loomed large on traditional stores of value across emerging markets, perpetual bonds would have escaped the draining rollercoaster had Sebi, acting upon a federal ‘request’ last week, come up with a set of revised rules on valuing such debt. But Sebi’s deafening silence had a loud impact: Yields on this variety of bonds sold by

and surged up to 103 basis points in secondary-market trades.

A basis point is 0.01 percentage point.

This is the sharpest rise in perpetual yields since the new capital market rule stoked concerns of valuation losses for mutual funds, the biggest investors in these quasi-debt securities.

When bond yields rise, prices fall.

Select mutual funds are said to have sold these papers, bought at hefty discounts by wealthy individuals and select large corporates, dealers said.

“Investors are turning impatient amid growing concerns,” said Ajay Manglunia, managing director – fixed income, JM Financial. “Distress sales could gather momentum if the regulator does not come out with a revised rule. Even top papers are not finding enough investor confidence.”

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A particular series of perpetual papers of State Bank of India changed hands at 60-78 basis point higher yields than usual.

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Perpetual papers of SBI, the sovereign’s proxy, are considered the safest in the category, dealers said. Similarly, Bank of Baroda papers yielded 85-103 basis points higher.

“The market is waiting for a direction from SEBI, as mutual funds are one of the major investors in perpetual bonds” said Vikram Dalal, founder and managing director, Synergee Capital. “Some wealthy investors with risk appetite are willing to bet on the perpetuals now.”

The Finance Ministry ‘requested’ the SEBI Friday to withdraw the part of its Wednesday circular that changed the rules followed by mutual funds to value perpetual bonds. The capital markets regulator is expected to review the rules before they take effect from April 1.

Wednesday last week, the capital market regulator asked mutual funds to value perpetual bonds with 100-year maturity. This applies to perpetual bonds, known as Additional Tier 1 (AT1).

The move could result in sharp mark-to-market losses for fund managers, who rushed to sell bonds and caused yields to spike.

“For the bond market to calculate yields for perpetual bonds, presuming a maturity of 100 years is difficult,” said Dalal.

These papers mostly have a five-year call option, which prompts market participants to price it as a five-year paper with a mark-up.


papers too yielded 8.55 percent, partially higher than the usual. ’s perpetual bond yielded about 50 basis points higher in thin trade.


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