With the bond market entering the second half of the financial year in a positive mood backed by the Monetary Policy that has left the room open for more rate cuts, asset management companies are also beginning to recalibrate their strategies to add longer duration papers, said fixed income heads and debt fund managers.
“In the short term, the outlook is relatively positive, reflecting more of a tactical shift in positioning with a slight increase in duration bonds (15 years and above). This is mainly based on expectations that market sentiment might improve further and there could be a minor pullback,” said Rajeev Radhakrishnan, CIO – fixed income, SBI Mutual Fund.
Agreeing to that, Devang Shah, head – fixed income, Axis Mutual Fund said that they have followed the similar strategy by slightly adding the duration bonds after the October policy.
For instance, SBI Mutual Fund’s long duration fund is fully invested with a cash position barely at 2.76%, according to the August 2025 factsheet, as against a cash position of 10.62% in July.
Post the June policy, the cash position had increased following a rate cut, but post the August and October policy fund managers are more confident and investing in long dated security. The mutual funds had reduced their long-term bonds and shifted to short-end of the curve since the June policy when the stance had been changed to ‘neutral’ from ‘accommodative’, anticipating no more rate cut on the table. The weak demand-supply dynamics and fiscal worries due to GST rationalisation further exacerbated the situation, leading to more sell-off by fund houses.
The sell-off took the yield on the 10-year bond to 6.65% level in August. However, the yields eased on realisation of lower-than-expected impact from GST slab tweaks. It further came down as the government reduced supply at the longer-end and RBI delivered a hawkish policy in October, indicating at least one-two rate cuts ahead. On Friday, the 6.33% 10-year bond closed at 6.54%. Followed by the policy, the yield flattened, with the spread between 10-year and 30-year falling to 56 bps from an average of 72 bps in August.
However, while the stance has stayed the same, the RBI in its October policy has acknowledged that it is willing to support growth more aggressively, especially if the US tariff imposition of 50% remains.
“We plan to maintain higher portfolio duration and increase allocation to g-secs, considering the current sentiment. SDL spreads have compressed over the last forthright period, and will wait for spreads to widen to add more state development loans (SDLs). Overall, we expect one more rate cut by the RBI, likely at the December MPC meeting, and will position the portfolio accordingly,” Puneet Pal, head-fixed Income, PGIM India Mutual Fund.
Though sentiment has turned positive, market participants do not call for a strong rally from here on. They expect the bonds to trade in a range in the near-term.
“Concerns over demand and supply have not fully eased. While the RBI has addressed the supply side, a clear pickup in incremental demand is yet to be seen. There is still no indication of a major directional move in yields, and the 6.33% 10-year bond is unlikely to fall below 6.40%. In the near term, bonds are expected to trade within a narrow range of about 5 basis points on either side,” said Radhakrishnan.