Frenzy around SBI bonds is not without reason

There have been newspaper reports about long queues outside specific SBI branches for submitting application forms for the SBI Bond series that opened for subscription on February 21, 2011.

As per a report, the SBI chairman reportedly apologised for the limited number of branches where the current issue was available and promised that for future issues this will be rectified.

It is one of the rare times when a debt market issue has excited the retail market to this extent. The corporate debt market has been the preserve of the treasury rooms of banks and a group of secretive brokers.

Very few retail investors are familiar with the corporate debt market and they can be forgiven if they are left wondering about the reason for this excitement.

There is adequate reason for the excitement with the grey market quoting fancy premiums for these bonds. Per-application premium being offered is Rs320 for the minimum subscription amount of Rs10,000 and to the extent of Rs18,000 per application for the maximum subscription under the retail category of Rs500,000. In this issue a retail investor (somebody who invests up to Rs500,000) in the 15-year bond gets a higher interest rate of 9.95% as compared to the other investors who only get 9.45%. The earlier 15-year SBI bond is being quoted at a market yield of around 9.40%.

Since this 15-year bond issue has slightly less favourable terms, the market is likely to expect a return of around 9.50% from this bond.

Given that scenario, it is likely that the bonds will be quoted at a premium when they are listed. (See box) Depending on the interest rate expectations in the market, the issue is expected to list at a premium of around 3.5%

In any case there is very little downside risk. Even if the Union Budget increases market expectations for interest rates significantly, the expectation from the 15-year bond is unlikely to exceed its coupon rate of 9.95% and hence, at worst, the investor will be able to recoup his capital back when the bond gets listed on the market. In any case for a long-term investor it is an excellent debt investment with the largest bank in the country.
So what can you do yourself?

It is a “must invest in” issue whether you are looking for a short-term gain (sell immediately on listing) or a really long-term high quality debt issue.

The issue is on till February 28, 2011.

However, since the allotment will be on first-come-first-served basis, it is not very clear if you will get any allotment if you apply for these bonds on the last day.

Check the oversubscription position before making the application. If you are unable to participate this time, look out for the next issue from SBI.

Harsh Roongta is CEO, Apna Paisa, a price & features comparison engine for loans, insurance and investments. He can be reached at hrdna@apnapaisa.com.