I got a few calls in the morning (late last evening perhaps) saying ‘OMG I missed the SBI bonds issue…now I will get a much smaller allotment than what I had thought’. Let me correct you Ma’am. You will NOT GET ANYTHING if you applied on Tuesday, because the issue was fully subscribed on Monday (18th Oct 2010) itself. Only the first Rs. 1000 crores worth of applications will be allotted. So if you applied at 3 pm (by which time it was oversubscribed 10 times) you will not get allotment! I know brokers who smartly decided to tear up applications on Tuesday instead of lending it to SBI for 15 days @ 9% p.a.

Be that as it may, if you missed the issue, there is nothing to grieve. SBI has done what is called ‘signalling’. Signalling in this case has meant that SBI is worried that interest rates will go up, and the reverend SBI itself will have to pay 9.5%p.a. interest. If a AAA bank has too pay (is willing to pay) 9.5%p.a. the lesser mortals will have to (HAVE TO) pay higher rates of interest. So Dhanalakshmi bank, Kotak, etc. will have to pay coupons in the range of 10 to 10.5% and lesser banks like City Union Bank will have to pay interest in the region of 12% p.a. This may not augur well for some players in the equity markets but it is good news for the people who missed the SBI bonds issue.

Soon you will have Mahindra Finance, Tata Securities, Tata Motor Finance,….etc. will come to the debt market with offerrings in the region of 10.5 to 11%p.a.

If interest rates go up, SBI bonds will be available at a discount. So like buying NHPC now (when the world is buying Coal India) you could be buying SBI bonds when the world is buying Tata Securities bonds @ 11% current yield. This is so because when you buy SBI bonds at a current yield of 11%, your YTM will higher, especially in the shorter duration bond 🙂