The Barbell Advantage: Positioning for stability and opportunity in Indian fixed income

Time of India

a day ago

The global fixed income backdrop is shifting as the US Federal Reserve looks poised to deliver its first rate cut of the current cycle this September. Markets place the odds of a 25 basis point cut at nearly certain levels, with the target fed funds range expected to move from 4.25–4.50% down to 4.00–4.25%.
With signs of slowing labour markets, muted inflation pressures, and the potential for up to three cuts before the end of the year, this marks a clear pivot from the Fed's long pause since December 2024.
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Whenever US yields have moved materially, Indian bond yields have tended to react, largely via sentiment and capital flows.
Previous easing cycles in the US have often led to benign moves in Indian yields, though the scale and speed vary depending on domestic conditions.
Right now, the global shift towards easing, if sustained, can encourage flows into emerging market debt such as India's — a factor that can help anchor local yields, especially in the absence of major fiscal shocks.
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Domestically,
Indian bonds
have held up in the face of global volatility. The RBI has already front-loaded policy easing since February, cutting the repo rate by a cumulative 100 basis points to 5.50%.
This was complemented by large liquidity support, with a further 100 basis point CRR cut to be phased in from September to November, adding approximately INR2.5 lakh crore of liquidity into the banking system.
Inflation has been running below the 4% target, with CPI in July printing at just 1.55%, though the RBI's projections point towards a gradual climb, crossing 4% in early 2027.
Growth forecasts remain steady at 6.5% for FY26, supported by rural consumption recovery and government-led
capital expenditure
.
As many market participants have also observed, the local yield curve has steepened in recent months, especially between the 10-year and 15-year maturities, as limited 10-year supply and cautious sentiment have pushed intermediate yields higher.
Ultra-long bonds have been relatively more stable. This steepening has occurred even though the underlying global and domestic macro backdrop arguably favours a constructive duration view.
For fixed income investors, the next 12–18 months seem to offer opportunities at both ends of the maturity spectrum. In the near term,
credit spreads
in high quality corporate bonds remain stable and attractive.
Pairing 1–5 year AAA-rated corporate bonds with short-duration accrual strategies can deliver steady income while benefiting from the downward drift in short-term rates as CRR cuts inject liquidity.
This part of the portfolio plays defence while locking in yields that may compress further.
The other leg of positioning is to maintain core exposure to
long-duration government bonds
, particularly in the 14–15-year segment and selectively at the very long end.
The steepening at the longer end seems to be overdone relative to fundamentals, and a normalisation of sentiment or moderation in supply could see spreads compress.
If Fed easing and global growth softness push US and Indian yields lower, this part of the book stands to benefit from capital gains.
Together, this barbell approach — accrual-oriented short duration plus strategic long duration — aligns with an outlook where local rates are near the end of their easing cycle but global conditions remain supportive for bonds.
The RBI may hold through October and consider one final 25 basis point cut in December, but even without it, abundant liquidity and anchored inflation expectations should keep yields well-supported.
Risks remain — from renewed inflation pressures, higher long-bond supply, or global shocks — but the balance of probabilities favours a stable to stronger bond market backdrop.
Investors, therefore, can use the current steepness in parts of the curve to add duration selectively while earning carry from shorter corporate exposures.
It's a patient strategy for a cycle that appears closer to its bottom in India yet is still in its early stages globally.
(The author is Managing Director and Head of Investment Strategy & Solutions, Waterfield Advisors.)