State Bank of India: SBI’s AT1 bond yields rise in secondary trades

Mumbai: State Bank of India’s additional Tier 1 bonds are likely to change hands in the secondary market for the first time, at prices lower than those of other lenders such as , Canara Bank and privately held HDFC Bank , bond traders said.

This quasi-equity

Securities returned 8.11%, or nine basis points, better than banks, with existing investors suffering mark-to-market losses. Traders attributed this to a higher supply of paper.

One basis point equals 0.01%.

“With a larger outstanding balance of bonds, SBI’s perpetual securities outperformed select other banks for the first time,” said Ajay Manglunia, Managing Director and Head of Investment Grade Group

. “Some investors could suffer mark-to-market losses as yields rise. They may have exited positions in a hurry, resulting in higher returns – nothing else.”

SBI AT1 bond yields rise in secondary trading

The State Bank of India’s additional Tier 1 bonds, also known as perpetual bonds, serve as a barometer for this segment, which has a history of investor losses.

The country’s largest bulk lender has an outstanding volume of such bonds of about £40.882 billion compared to HDFC Bank’s £3.000 billion in the local market, data compiled by JM Financial shows.

Bank of Baroda and have shares outstanding of ₹12,355 crore and ₹12,436 crore respectively.

Perpetual bonds do not have a fixed term, but generally carry a five-year call option, an exit route for investors if exercised by the borrower.

HDFC Bank AT1 bonds traded at 8.02% in the secondary market and Bank of Baroda and Canara Bank reported trading at 8.08% and 8.06% respectively.

When bond yields rise, prices fall.

All of these papers have recently been sold on the primary market.

At the beginning of September, SBI sold ₹6,872 crore of perpetuals and bid 7.75%. It met with an encouraging response from short-term investors who are likely to seek trading profits. Since early September, the benchmark bond yield has risen by as much as 42 basis points, raising the overall cost of funding amid an ongoing cycle of rate hikes.

“The market is replete with SBI and other public sector bank lending, so it is now showing a preference for private sector lending through the secondary market route,” said one banker.

The local AT1 bond market dried up as select banks either chose not to exercise call options or wrote off the debt according to the built-in features of the instrument.

Recently, HDFC Bank started selling AT1 in the offshore market. At home, SBI took the lead in reviving the same as investors always put their trust in the state-backed banking pioneer. Wealthy individuals, pension funds, insurers, and even mutual funds have recently started investing in perpetual bonds. State Bank of India: SBI’s AT1 bond yields rise in secondary trades

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