SBI bonds create trading opportunities

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For all the hurdles faced by lenders, there are bank bonds out there that investors can't get enough of. State Bank of India’s (SBI’s) perpetual notes — so called because they lack a fixed maturity date — are being hoarded and hunted by traders betting the nation's biggest lender will buy them back within the next 10 weeks as it puts its capital structure in line with Basel regulations.

That’s created a trading opportunity for investors like Carl Wong of Nexus Investment Advisors and Raj Kothari of Jay Capital, who say SBI’s perpetual bonds are the only notes that have yet to be redeemed as part of the revamp. Lenders around the world have been scrabbling to redeem bonds issued before the financial crisis that won't count toward core, Tier-1 capital as the Basel III norms come into effect. Indian banks have an extra incentive to call the debt: they're flush with cash after households poured money into deposits following the government's decision in November to pull high-value banknotes from circulation to combat tax evasion and graft.

"This is a very low-beta, low-risk, high-return trade," Wong said in a London interview. "If I can put more money into it, I would. At yields of about 6 per cent, they can be a good shock absorber in a portfolio as global rates go up."

SBI's $400 million bond, which pays a coupon of 6.439 per cent, traded at a bid yield to next call of 6.26 per cent on Wednesday.

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