Investors reminded of dangers of investing in perpetual bonds

That happened to be the case for the perps issued before 2007 since benchmark rates dropped steadily and touched record lows last year.

But this time is different. Yields on benchmarks such as US Treasuries and German Bunds are on the rise and most analysts think that they will be much higher in five years than they are now. "[The trend in rates] means it will be quite challenging for longer-dated bonds going forward," said a portfolio manager in Singapore. Hence, the possibility that Reliance will be able to refinance its bonds at a lower yield is remote.

That is why fund managers were suspicious of Reliance's perpetuals. If Treasury rates are higher, corporate yields are probably going to be much higher than they are now. So it is unlikely that Reliance will want to buy back the bonds by incurring more expensive debt.

In fact, fund managers have been demanding that companies include a significant yield hike after the first call date to give them safety that if the bonds are not redeemed. At least then their returns will match the new corporate yield reality.

Reliance did not include that and institutional investors stayed mostly away from it. But this was just the latest example of how savvier investors are shunning perpetuals without a significant step-up.

Similar notes from Chinese developer Agile Properties sold a few weeks ago at 100.00 are still trading around 95.00. Meanwhile, perps with step-ups are doing just fine.

"The argument

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