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Rally in long bonds nears end as key drivers weaken, says Axis AMC
'The primary concern for long-duration bonds is no longer about spreads or yield levels — it lies in the deteriorating demand–supply dynamics, both structurally and tactically,' wrote Devang Shah, head – fixed income, Axis Mutual Fund.
In the financial year (FY) 2026, demand for long-duration bonds (10 years and above) is estimated at ₹10.8 trillion, while supply is expected to touch nearly ₹12 trillion from central government and state development loans (SDLs) with maturities of 15–50 years, according to the note.
Additionally, demand is likely to be impacted by revised Held to Maturity (HTM) guidelines for banks, increased equity allocation under the National Pension System (NPS), and restrictions on incremental foreign portfolio investor (FPI) participation in securities beyond 14 years under the Fully Accessible Route (FAR).
Other drivers behind the rally have also weakened. The Reserve Bank of India's (RBI's) shift in policy stance signals that aggressive rate cuts are unlikely, while the scope for further fiscal consolidation — a recent market support — is also approaching its limits, the note said.
Going by past trends, any significant decline in yields of longer-dated bonds from current levels is unlikely. 'Over the longer term, it is observed that the yields do not fall below 6.75 per cent in the 30-year bonds,' Shah stated.
'Investors should consider shifting to short-duration or accrual strategies. The steepening yield curve favours 2–5-year corporate bonds, which offer better risk-adjusted returns,' he added.
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