Why are people going mad over the IPO of a bond?

Feb 26, 2011

In this issue:
» Fear is not a driving force behind gold
» For realty, the action is not in the metros
» What is really wrong with huge MBA salaries?
» The 'black gold' gained a huge 12% during the week
» ...and more!

-------------------------------------------- Free Guide --------------------------------------------
The Definitive Guide To Financial Planning
To claim your FREE copy, just reconfirm your subscription to The 5 Minute WrapUp!.

It is not uncommon to see a mad rush for an equity IPO of a blue chip company in India. But in a first of sorts, the same kind of frenzy has been extended to the IPO of a corporate bond. Yes, that's correct. People seem to be falling head over heels to subscribe to a bond issue. The issue in question is none other than the ongoing retail bond issue of the country's largest bank, SBI.

As per a leading daily, the bond issue is a big hit in the grey market. Brokers in big metros seem to be willing to offer a significant premium to investors to apply for the issue on their behalf. As per another daily, long queues have been seen outside specific SBI branches for submitting forms for the issue.

Indeed, if so many people are gung-ho about the issue, there could surely be something going for it. There certainly is. In a world starved of yields, the bonds are offering returns in the region of 9.5%-10%. And that too with very little downside risk we believe.

What does the entire episode teach us? Well, if the demand for the bond is anything to go by, we seem to be living in a world of negative real interest rates. In other words, the return that we are getting from other lower yielding financial assets is not enough to cover our cost of living. Had that not been the case, a bond offering close to 10% yield may perhaps not generated so much excitement.

Are there another ways to earn positive inflation adjusted or real returns? Of course, there are. Investing in companies that have good pricing power, are run by honest managements and are available at reasonable valuations is the most effective route we believe. Besides, real assets like gold and silver and other commodities could also offer good returns according to us. The most important element is perhaps not to keep too much cash at any given point in time.

What do you think? Do you think we are living in a world of negative real interest rates? Let us know your views or post your comments on our Facebook page.

 Chart of the day
Today's chart of the day shows India's oil import bill as a percentage of its nominal GDP over the years. Although the bill hasn't done badly if only the 1HFY11 data is taken into account, it should be noted that oil prices have risen quite a bit since then. Hence, there is a strong chance that the bar to the extreme right may go up even more by the time data for the full year is compiled. We won't be surprised if it gives the percentage reached in FY09 a good run for its money.

Source: LiveMint

2010 was a 'golden' year. Overall demand for the precious, yellow metal increased 9% to reach a ten-year high. What is interesting is that demand for gold was driven, not by fear, but by love! Jewelry accounted for 54% of total demand, with India leading the pack. Jewelry demand rose in the country in 2010, surpassing previous peaks set in 1998. Half of this demand came in the last quarter, during the Diwali festival season.

Indians are known world over to be bargain hunters and savvy buyers. So, with them buying so much gold with prices at their highs, suggests that prices may not have peaked as yet. China was also not far behind, seeing huge demand for the metal during its New Year festival. Demand from this mammoth economy has also been rising on the back of higher wage levels among its migrant workers. With both economies hurtling full speed ahead, income levels are also expected to see a corresponding rise. Consumption of gold in China and India is around 0.25 grams per person. Compare this with Saudi Arabia where over 3 grams and Hong Kong where over 2 grams are consumed. So the trend is just getting started! With the love affair with the metal far from over, it won't be surprising if prices appreciate further.

You know how the financial markets are doing by the salaries investment banking firms dole out to MBA students. And the financial markets are surely doing well. This has been validated by reports that the investment banking unit of Deutsche Bank has offered an IIM-A student an annual package of RS 15 m to join its London office. And Deutsche Bank isn't alone. Its peers like Morgan Stanley, UBS and Nomura are offering almost similar packages to fresh MBAs these days.

"Aggressive hiring by investment banks is a reflection of the world economy," a senior Citibank official has reported to be have said. Dear Mr. I-Banker, we are not so sure of investment banks reflecting the state of the world economy. These banks, given the mammoth profits they generate and mammoth compensation they pay while delivering negative value to the society, can well be termed as parasites.

Investment banks, as we have seen in the past, misallocate capital. They predate and lead accounting and corporate frauds. They add nothing to the long term wealth of a country. And they ruin the savings and investments of small investors by selling them poisonous financial products. The irony is that despite all this malaise and corruption, they grab the headlines while those who suffer at their behest are left staring at the empty barrel.

The real estate market in metros like Delhi and Mumbai has pretty much gone dry. But, the action is really heating up in Tier II cities like Lucknow, Indore, Mohali and Jaipur. Aspirations are huge. And people are longing for open spaces and better lifestyles. Incomes have also been rising to support the same. People buying homes include government servants, benefitting from new pay scales, professionals, and the new-generation business community.

Wouldn't you like a bungalow, a swimming pool, clubhouse, wide spaces? Well, most people are opting for these luxuries by moving away from the traditional city centers into townships. Infrastructure development has also done wonders. Highways, wide roads, new flyovers etc in these towns have catapulted the local economies. Property prices are affordable, and they have been slowly appreciating, leading to the attractiveness for investors. Real estate majors like Omaxe, Ansal Group, Emaar MGF and Parsvnath Developers are all riding the wave. This Tier II push is helping them offset losses in metros like the NCR region. Definitely in India, you cannot grow if you ignore the non-metros.

Meanwhile, all the global markets closed in the red this week. The biggest loser was Germany, down 3.3% while China lost the least (down 0.7%) among all key global markets. This dismal performance was due to the political tension in the Middle East which drove up crude oil price by 12.2% WoW.

In Asia, the biggest loser was Japan (down 2.9%) while India followed close behind (down 2.8%). Hong Kong and Singapore also closed the week down 2.5% and 2% respectively. In Europe, France closed the week down 2.1% while UK was down 1.3%. In the Americas, US was down 2.1% while Brazil was down 1.7%.

Source: CNNfn, Yahoo finance, Kitco

 Weekend investing mantra
"There are two times in a man's life when he should not speculate - when he can't afford it and when he can." - Mark Twain

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Why are people going mad over the IPO of a bond?". Click here!

15 Responses to "Why are people going mad over the IPO of a bond?"


Feb 27, 2011

How is SBI, a bank (in which majority is owned by govt.) and is
a listed entity allowed to falsely create a demand for its bond.
Even if this is done independently by a third party
institutional or another HNI investor, how can this be allowed -
i.e. to tip/reward /bribe retail investors to subscribe to the
bond issue and create an artificial or wrong ownership than what
is allowed as per terms of the issue.... SEBI must NOT allow
such practices otherwise same route will be adopted by
unscrupulous and unethical financial-wizards and gullible
investors will lose money....



Feb 27, 2011

Cash is always a king. Always. Sensex was 11000 in 2006 Jan and now in Jan 2011 it is 18000 what is the growth. Nothing People talk about long term investment in stock market etc. Dont you think 5 years is not a long term. Stock market was good for investment when sensex was at 4000. Long term sensex gave some 12% in 15 years period. FD gave 9% interest. What is the big difference. Nothinq. With tax brackets upto Rs. 5 lacs is going to be at 10%, it is wiser to invest in FD at 9.5% for 3 years and keep quiet.



Feb 26, 2011

I share my thought with many others, that the current downfall in the equity markets is a very strong reason for the huge success of SBI bonds issue.


C K Vaidya

Feb 26, 2011

Negative Interest Rate Regime

First and foremost, the bonds are for 5-10 years. Investors don't expect to have inflation running at 9.5-10% P.A. over the period of next 5-10 years. Hence, the bonds will fetch positive real interest for the investors.

Secondly, the high demand for these bonds suggests that the investors may be giving preference to safety of small positive real interest rather than invest in other asset classes such as Real Estate where prices are already at high rates, thereby exposing them to potentially negative returns and Stock Markets whose gyrations have left many investors poorer.

Gold over the long term has given poor rate of returns and with prices already high, investors can benefit only from collapse of world economic order. When people predict Gold prices as high as $2000 to $5000 per ounce, they are basically saying that $ is doomed, in which case the $:Re exchange rate may well be significantly different from the current rate. e.g. If $ was to go down to, say, Rs 35, even if the Gold reaches $188, the investor would not make any money at all.

Bonds seem to offer small positive real returns over medium to long term and preferred over other risky asset classes.


Parin Thacker

Feb 26, 2011


Though we may use the formula Returns-Inflation to determine whether real positive / negative interest rate, for a common man, it is returns - food inflation.



Gopal Kalpathi

Feb 26, 2011

Investment Bankers:-

The bank themselves (as rightly pointed out by CITI and posted here by you) are parasites. So naturally the most important aspect of a parasite is to find a host, multiply and kill the host so that the multiplied millions can find fresh hosts.

As long as the human tendency to worship material wealth continues, we will find more such avenues. Humans are the only species in this world who knows only to take more than what they give back. Look what we have done to nature and environment. The very life sustaining resources, not only for the human species but all living creatures. It is no good blaming only the investment banks and I-bankers every individual should start to look inside oneself to see where they stand in terms of their life ambitions. Sooner the better


Shome suvra chakraborty

Feb 26, 2011

It is mentioned in the text that owing to certainity of higher return than other asset classes is boosting demand for bonds.It may be also true that owing to uncertainity of share market money is flowing to bond market for assured return.



Feb 26, 2011

Its a mind boggling article , u can also refresh ur computer i.e. ur ( mind computer). THANX.


sunilkumar tejwani

Feb 26, 2011

yes, we are living in a world of negative rate of return on safer investments like treasury bonds or for the matter Bank FDS'where interest rate are much lower than the rate of inflation. Thanks to all Central Banks who have pushed filthy liquidity into the financial systems, keeping the cost of money artificially low & fueling the inflation. In such scenario, any institution offering risk free return of 10% is welcomed by one & all.When equity markets start giving negative returns & the inflation is raging like fire, any investor/saver will naturally get attracted to a risk free 10% return. Further, in stock market well managed companies are valued at sky high valuations, i.e. all the positives are already factored into their prices.


Shome suvra chakraborty

Feb 26, 2011

The growth rate of real GDP if greater than real interest rate along with the reduction of primary deficit as a percentage of GDP reduces debt-GDP ratio.

Equitymaster requests your view! Post a comment on "Why are people going mad over the IPO of a bond?". Click here!