Current bond yields are attractive for investors: How to make the most of them?

Indian bonds, in terms of yields, are at attractive levels at this point in time, making them a investment option. Any potential downside from current levels is expected to be limited in scope.

“Bond yields in the January–March 2026 quarter are likely to remain range-bound with a clear upward bias, rather than trend decisively lower,” says Tushar Sharma, Co-Founder at Bondbay.

While inflation remains benign and the RBI has taken visible steps to manage liquidity through OMOs, FX swaps, and short-term operations, the bond market is currently responding more to fiscal dynamics and supply conditions than to the monetary stance alone.

The rebound of the 10-year G-sec yield above 6.6% reflects this reality. Even as the RBI signals accommodation, the large government borrowing programme and persistent supply overhang are limiting any sustained rally. Importantly, the RBI’s actions so far appear more defensive, aimed at preventing disorderly tightening, rather than proactive attempts to push yields materially lower.

As a result, yields are unlikely to fall meaningfully in the near term unless there is a sharp change in either global rates or domestic fiscal expectations.

“A 6.6–6.7% trading range for the 10-year benchmark appears most likely for the remainder of the quarter, with OMOs acting as a stabiliser rather than a catalyst for a rally,” says Sharma.

These factors include inflation being closer to the RBI’s moderate target, not much expectation of a rate cut (terminal repo rate that is closer to 5.25%), and elevated borrowing as a pressure point. Additionally, portfolio adjustments linked to India’s deferred inclusion in global bond indices have triggered intermittent selling.

Eyes on Budget

Global geopolitical tensions are likely to increase defence spending across countries, leading to higher fiscal borrowing globally. “In India, bond market participants will be actively looking at the Union Budget announcement on 1st Feb, with a primary focus on gross borrowing numbers. This will guide immediate market trends for Indian Government Bond yields,” says Sameer Karyatt, Executive Director and Head of Trading at DBS Bank India.

Bond yields to remain elevated

“G-sec buying by RBI and fiscal year-end demand from EPFO, Insurance companies and banks should see the ten-year G-sec yields stabilising around 6.50% to 6.70% levels. Corporate bond yields may see some upward movement in the coming months due to year end considerations and supply of corporate bonds,” says Murthy Nagarajan, Head-Fixed Income, Tata Asset Management.

Experts are unanimous that current bond yields are something that investors may consider for investment purposes.

Time to look at debt funds?

For debt mutual fund investors, the current yield environment offers an opportunity to lock in relatively attractive rates, particularly at the shorter end of the curve, says Harsimran Singh Sahni, Executive Vice President- Treasury Head, Anand Rathi Global Finance. The shorter end of the curve in bonds typically refers to maturities of 1 to 2 years. The 5-year segment is currently trading in the 6.50%-plus range and offers favourable risk-adjusted returns in a stable rate environment.

Given expectations of status quo rate in the next few meetings, shorter- and medium-duration strategies appear better positioned than long-duration exposures, where volatility from supply dynamics remains higher, advises Sahni.

“For mutual fund investors, the current environment calls for measured expectations rather than aggressive positioning,” says Sharma. With yields already elevated and rate cuts not imminent, the opportunity lies more in earning steady accruals than in betting on capital gains from falling yields.

Investors should be cautious about extending duration purely in anticipation of policy easing. “Instead, portfolios aligned to shorter and medium-term horizons may offer better risk-adjusted outcomes, particularly as mark-to-market volatility could persist in a supply-heavy market,” says Sharma.

In the end, the investor must know his/her investment priorities.

This is also a period where discipline matters — understanding the underlying risk profile of funds, avoiding knee-jerk switches based on short-term yield movements, and focusing on consistency rather than timing the rate cycle are key things investors must keep in mind.

“Funds focused on short-duration, money market instruments, and high-quality corporate bonds are relatively better positioned in a range-bound or mildly rising yield scenario. These categories tend to benefit from stable accruals and are less vulnerable to mark-to-market losses when yields inch upward,” says Sharma about which are the MF categories that the investor could consider at current bond yield levels.

“Today, G Sec and high-quality corporate bonds are giving returns which are higher than fixed deposit rates of many banks,” says Nagarajan. Investors can get accrual plus capital appreciation in the coming months as and when geo political climate improves. The downside is limited if investors are investing at these elevated levels.

How various MF categories would fare in a bond upmove

“A bond upmove, characterised by falling yields, would support performance across most debt mutual fund categories, though the extent of gains would vary by duration,” says Sahni.

Liquid, Overnight and Short- and medium-duration securities are likely to be impacted the least if the yields started to inch higher. The 3-5 year segment carries fewer mark-to-market losses, which can be compensated by accrued gains.

In contrast, long-duration funds with exposure to 10-year and 30-year maturities may be less attractive. Although these funds are more sensitive to interest rate movements, their performance can be constrained by factors such as supply pressures, fiscal dynamics, and elevated volatility. “As a result, the risk-adjusted upside in long-duration strategies may remain limited even during a broader bond rally,” says Sahni.

Peeking into the mind-set of the bond managers

While every investment manager has his/her own approach and priorities for how to invest in current markets, experts have given us a peek into the mindset of how the fund managers are possibly thinking at this point in time.

“As markets gradually price in policy easing, portfolio strategies are likely to focus on optimising duration exposure while managing risks from supply and policy uncertainty,” says Sahni.

In practice, debt fund managers would have cut down their exposure and moved towards the shorter end of the curve across government securities and SDLs. They are likely to gauge their market outlook by looking at the global inflation yield trend, local supply and demand dynamics, commodity prices and RBI monetary policies.

‘There is no broad-based rush to deploy aggressively, but neither is the market completely on hold,” says Sharma. Managers are selectively adding exposure at higher yields, particularly in segments where valuations look reasonable, while maintaining sufficient liquidity to respond to future opportunities.

“The prevailing approach is cautious accumulation rather than conviction-driven positioning,” says Sharma. Most managers appear to be waiting for greater clarity post the February RBI policy, especially on how firmly the central bank intends to lean against supply pressures and how global conditions evolve.

“The fund manager will be carrying positions in government securities due to the expectation of lower fiscal deficit and RBI buying bonds in OMO,” says Nagarajan. Carry in bonds is a terminology that refers to the income an investor earns, or the expense that they pay, simply for holding a bond over a specific period of time.

(Manik Kumar Malakar is a freelance author. He writes on personal finance, bonds and equity markets.)

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.