Business
No more rate cuts, but high yields create tactical opportunities in long bonds, says Vikas Garg
Yet, even as further rate cuts look unlikely, elevated bond yields and widened term spreads are creating selective tactical opportunities—particularly at the longer end of the curve.
Speaking to Kshitij Anand of ETMarkets, Vikas Garg, Head – Fixed Income at Invesco Mutual Fund, explains why real yields remain compelling despite record borrowing, how supply dynamics are shaping the yield curve, and what signals investors should watch for before taking exposure to long-duration funds.
Unrated and lesser-known issuers are increasingly tapping the debt capital market, raising ₹1.5 lakh crore in FY26, driven by investor appetite for higher yields. These issuers prefer unrated structures to bypass procedural delays and regulatory disclosures, with private credit funds and AIFs emerging as key buyers.
He also outlines where corporate bonds, sovereigns and short-duration strategies fit into portfolios in the current macro environment. Edited Excerpts –
Q) Did the RBI policy outcome at this point largely meet expectations post Budget?
A) The MPC delivered a well-balanced policy, maintaining the status quo on both rates and stance, broadly in line with market expectations.
The RBI under Governor Malhotra has continued to emphasize action over guidance, having already delivered a cumulative 125 bps rate cut alongside a series of pre-emptive liquidity measures to ensure adequate system liquidity.Importantly, this policy came against the backdrop of clarity on two key variables fiscal policy and the India-US trade framework.
While the Governor reiterated a pre-emptive approach to liquidity management, the absence of specific announcements on additional liquidity measures disappointed the market.
Q) Do you think India is entering a structurally stronger phase compared to the past few years?
A) Yes, India continues to stand out as the fastest-growing major economy, well contained inflation, sound credit environment and a favorable demographic profile. This is further supported by credible fiscal and monetary policymaking, along with political stability.
Together, these factors reinforce confidence that the current strong macroeconomic backdrop is not cyclical alone, but has the potential to be sustained.
Even as financial markets are largely driven by domestic factors, global volatility can also impact the domestic markets especially when INR comes under pressure.
Q) If growth accelerates in the second half, could rising inflation alter the RBI’s rate trajectory?
A) While India is expected to remain the fastest-growing major economy in the coming financial year, the growth trajectory is still broadly aligned with potential growth and therefore not inherently inflationary.
Headline inflation this year has been at record lows, even with elevated prices of precious metals, while core inflation excluding these components remains well below the RBI’s 4% target.
Additionally, the forthcoming revision of the CPI basket where food weights are expected to decline could further moderate volatility.
Against this backdrop, inflation does not appear to be at levels that would cause near-term discomfort for the RBI. The key risk to this view remains the monsoon, given the inflation’s sensitivity to agricultural outcomes.
Q) How meaningful could potential inclusion in Bloomberg bond indices be for Indian bonds?
A) Such inclusion would be very meaningful. FY27 will see a record high gross supply of sovereign and SDL securities which will test the market appetite, especially in the backdrop of no more rate cuts going forward.
With higher gross and net borrowing outlined in the upcoming fiscal year’s Budget, the entry of a large and stable new investor base through index inclusion would provide meaningful relief to the yield curve.
Q) Given lower inflation and strong growth, what duration strategy would you recommend for investors today?
A) At present, the yield curve appears stretched, and concerns around demand–supply dynamics persist. As a result, the curve may remain steep, particularly with continued heavy supply from both the Centre and states leading to some duration fatigue.
Current 10 yr G-Sec yield at ~6.75% gives a ~150 bps term spread over the 5.25% repo rate, such spreads were last seen during the past rate hike cycle.
With the current inflation running low at ~2% for FY26, the real yields at more than 4.75% are quite elevated, making risk-reward favorable. Even the short end yields are elevated on supply concerns.
Market sentiments have turned positive after the announcement of US-India trade agreement and we expect investor appetite to pick up at these high yields. Also, as RBI conducts more OMOs and possibly G-Sec switch operations, it will help in addressing the huge fiscal supply concerns to an extent.
Considering the risk-reward dynamics, we believe Ultra Short, Money Market and Low Duration funds provide limited volatility and high accrual.
At the same time, actively managed short-term funds and corporate bond funds with balanced exposure towards 2-4 yr corporate bonds and 5-10 yr G-Secs provide suitable opportunities for core allocation in CY2026.
Q) Is there scope for a tactical entry into long-bond investing this year, and what would signal such an opportunity?
A) Yes, as we move into the next fiscal year, there could be selective tactical opportunities at the longer end of the curve.
While the government has announced a sizeable borrowing program, it has also built buffers into the fiscal framework. Upside surprises such as higher-than-expected RBI dividends, stronger GST collections, or increased mobilization through NSSF could create windows for tactical long-duration exposure during the year.
Even though with a risk of higher volatility, one can look at Gilt funds as a tactical call given that the term spreads have jumped sharply higher.
Q) How should retail investors approach long-duration funds in the current environment?
A) Retail investors should view long-duration funds primarily as a core allocation towards the buy and hold like strategy of risk-free assets as these funds can be extremely volatile depending upon the market conditions.
At times, such long-duration funds can also be used for tactical calls to benefit from the capital gain opportunities.
At the current juncture, term spread has widened sharply due to fiscal supply overhang and one can look at long-duration funds as a tactical exposure as the term spread may compress over next few months if demand from long investors like PFs, insurance companies etc picks up towards the FY end.
Q) Would you prefer sovereign bonds, SDLs, or corporate bonds at this stage?
A) At current valuations, corporate bonds in 1 – 4 yr tenor space appear attractive, with spreads over G-Sec offering a healthy accrual opportunity.
That said, sovereign bonds continue to play an important role as a potential source of capital gains, given their sensitivity to policy and macro developments.
With several negatives already priced in and yields near the upper end of the expected range, sovereigns especially in 5-10 yr space do offer some capital appreciation potential.
Q) How do higher borrowing numbers influence your outlook for the 10-year G-sec?
A) Higher borrowing impacts both the pricing and the shape of the yield curve. We expect the curve to remain relatively steep, with the longer end experiencing continued duration fatigue, while the shorter end stays supported by the RBI’s commitment to maintaining adequate liquidity in the system.
In the current environment, we see the 10-year G-sec trading in a range of 6.65% to 6.80%
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
Australia’s share market has clutched a second session of gains, led by a strong performance from mega miner BHP, which helped offset weak performances elsewhere.
The S&P/ASX200 edged 21.8 points higher on Tuesday, up 0.24 per cent, to 8,958.9, as the broader All Ordinaries rose 18.7 points, or 0.2 per cent, to 9,182.5.
“With US markets closed overnight for Presidents Day and several Asian markets shut for Lunar New Year, local earnings have taken centre stage – and BHP has comfortably stolen the show,” IG market analyst Tony Sycamore said.
“BHP delivered a blockbuster first-half result, sending its share price up more than 7.5 per cent to a record high of $54.20, before easing back to close 4.7 per cent higher at $52.74.”
The move added an extra $11 billion to the miner’s market cap, taking it to a valuation of $267 billion.
Mining giant BHP has helped push the Australian stock market higher. (Susie Dodds/AAP PHOTOS)
Only four of 11 local sectors ended the day higher, led by a 1.3 per cent boost to raw materials thanks largely to BHP, as gold miners retreated and other sub-sectors were mixed.
Gold itself eased to $US4,898 (A6,937) an ounce, as US dollar strength and risk-on sentiment weighed on the safe haven.
The heavyweight financials sector traded just below flat as Westpac carved out a 0.3 per cent lift and its remaining big four competitors fell behind.
NAB shares fell 0.4 per cent ahead of its first-quarter results announcement on Wednesday.
Energy stocks dipped 0.4 per cent, tracking with a similar move in oil prices ahead of more US-Iran talks over the latter’s nuclear program.
Elsewhere in the segment, coal miners traded lower and uranium stocks were mixed.
Consumer discretionary stocks had a positive day, up 0.5 per cent, with help from JB Hi-Fi after it’s share price jumped by roughly one-fifth in two sessions since reporting a 7.4 per cent sales jump in the recent half.
In other earnings news, Seek fell more than three per cent after it reported a $178 million loss, due in part to an impairment on its stake in Chinese jobs platform Zhaopin.
Shares in Baby Bunting Group rocketed more than eight per cent higher after the maternity and baby goods company posted a 44 per cent increase in first-half underlying net profit compared to the prior corresponding period.
The Lottery Corporation, Suncorp, NAB, Mirvac and GrainCorp will hand down interim results on Wednesday.
The Australian dollar is buying 70.62 US cents, down from 70.88 US cents on Monday at 5pm, dipping slightly following the release of the Reserve Bank’s February meeting minutes.
“While the board cited stronger activity, resilient consumer spending and persistent price pressures as justification for February’s tightening, the absence of a pre-set rate path has kept the currency subdued,” Zerocap analyst Emir Ibrahim said.
“Attention now shifts to this week’s wage price index and labour market data for confirmation on whether domestic strength is sufficient to sustain the RBA’s hawkish bias.”
ON THE ASX:
* The S&P/ASX200 rose 21.8 points, or 0.24 per cent, to 8,958.9
* The broader All Ordinaries gained 18.7 points, or 0.2 per cent, to 9,182.5
CURRENCY SNAPSHOT:
One Australian dollar trades for:
* 70.62 US cents, from 70.88 US cents at 5pm AEDT on Monday
* 108.01 Japanese yen, from 108.58 Japanese yen
* 59.64 euro cents, from 59.73 euro cents
* 51.90 British pence, from 51.96 British pence
* 117.06 NZ cents, from 117.42 NZ cents
It marks the highest rate since the Covid pandemic, official figures show.
Five Western Australians have been included in Angus Taylor’s new shadow ministry, which features Tim Wilson and Susan McDonald in the important treasury and resources portfolios.
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UK wage growth slowed at the end of 2025, ONS says
“If you bought gold and silver over the past year and a half, this is the time to take profits and be a fence sitter,” said Sahil Kapoor, head – Products, and market strategist, DSP Mutual Fund.
Over the past 18 months, gold has been up 101% in dollar terms and 116% in rupee terms. Silver has surged 167% in dollar terms and 198% in rupee terms.
While international silver has dropped 36.63% and gold is down 7.8% from their recent lifetime highs in January 2026, the lower prices may not warrant major fresh allocations at this juncture.
“Precious metals are priced to perfection after the sharp run-up in prices we saw over the last couple of years,” said Akshay Chinchalkar, managing partner and head of strategy, The Wealth Company. Chinchalkar recommends waiting for a “big crack” before deploying lump-sum funds and prefers that investors use Systematic Investment Plans (SIPs) – a staggered form of deployment – to build gold exposure.
AgenciesWealth managers feel risk reward for sector ETFs may be stretched after bullion’s rally
Gold and silver have rallied mainly on safe-haven demand, driven by simmering geopolitical tensions, aggressive US trade policies, inflationary pressures and sustained central-bank buying. Silver’s surge, however, goes beyond its role as a store of value: the metal’s expanding industrial demand – from solar panels and electric vehicles to AI-related technologies that have seen swelling investment in recent years – has also fuelled its rise.
The strong rally prompted Indian investors, deprived of gains in equities here, to pump record sums over the past couple of months. Monthly inflows into gold and silver schemes topped equity funds for the first time in January. Precious-metal ETFs drew ₹33,503 crore during the month – more than double December’s ₹15,600 crore and higher than ₹24,029 crore into equity schemes. Flows into equity mutual funds dipped 14% in January from the previous month. Investors would be better off not crowding into these products, said strategists.
“New investors should not enter with large weights or allocate fresh funds at this time. At best, to avoid FOMO (Fear of Missing Out), start a token SIP, if you can’t control your urge to participate,” said Kapoor.
A sharp move in Engineers India has been one of the talking points, with the stock posting strong gains over consecutive sessions. Market expert Dharmesh Kant from Cholamandalam Securities noted that the recent action appears more technical than fundamental.
“This is just some MNC brokerage report and some buying. Small buying can spurt the stock price and there are no sellers. We are not interested in the space because exploration and production of oil and gas is headed for a sunset over the next 10-15 years. Trades can happen in between, but long-term traction cannot be built on yesterday’s stock price action.”
Defence Emerges as a Preferred PSU Theme
Defence remains a standout theme for long-term investors. Kant highlighted that execution concerns are overstated, given robust order books and improving delivery timelines.
“The only space which looks attractive to me is defence. Execution issues are not a problem. Hindustan Aeronautics has a robust order book, and Q3 numbers exceeded expectations. Over the next two-three years, these companies will surprise on execution and margins. HAL could post 32-33% operating margin with 15-20% revenue and PAT growth. Defence is a play we like. Power is another—projects are commissioning and FY27 PAT growth could be 30-33%.”
Order Books Seen as Strength
Large defence order books provide predictable revenue streams. Kant explained:
“Order books are given by the Government of India and ensure better revenue and profitability. BEL’s PAT grew 20% this quarter. Execution cannot exceed 15-17% in any capital goods company, and they are delivering. Concerns about large order books are misplaced.”
IT: Tactical Opportunity, Structural Concerns
On the technology front, short-term trading opportunities exist, but structural growth challenges remain:
“Indian IT companies’ contribution in Nifty 50 earnings dropped from 22% in FY20 to 11% in FY25. Growth has lagged due to multiple factors. There could be a bounce in the next two to four months as Q3/Q4 numbers come in, but from a long-term perspective, we do not recommend IT stocks.”
The Bottom Line
Investors are urged to differentiate between tactical momentum and structural opportunity. Defence and power offer visibility backed by policy and execution, oil and gas exploration faces headwinds, and IT presents short-term trading potential but long-term uncertainty.
Diamond Hill Capital Management, Inc. is a wholly owned subsidiary of Diamond Hill Investment Group, Inc. Diamond Hill Investment Group is a publicly traded company, and its shares trade on the NASDAQ (Ticker: DHIL). Note: This account is not managed or monitored by Diamond Hill Capital Management, and any messages sent via Seeking Alpha will not receive a response. For inquiries or communication, please use Diamond Hill Capital Management’s official channels.
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