The US Federal Reserve delivered a 25-basis-point rate hike on 16 September, with the US 10-year Treasury yield touching about 5.02% that day—its highest in at least a year. According to reports from Mint, the yield eased to about 4.93% the next day but climbed back to almost 5% by 18 September. A year ago, the yield hovered at about 4.09%, meaning it has risen close to 90 basis points since then. The rate hike has created significant volatility in bond markets, but fund managers suggest the rise in yields also opens up entry points for investors. Current market predictions show a 63% chance of another hike, according to Fed Funds Futures data from Bloomberg, with the next decision largely dependent on Fed Chair Warsh's increasingly hawkish stance on inflation. Long-term bond yields in the United States, the United Kingdom, Germany, France and Japan have risen by between 20 basis points and 70 basis points from their late-June lows, with the increase around 40 basis points in the US and UK, as noted by Aberdeen Investments chief economist Paul Diggle. Some yields have already risen to multi-decade highs, with the S&P 500 Information Technology sector trading at 20.5 times estimated earnings for the next 12 months, down from almost 26 times at the beginning of June.
Back home, the benchmark 10-year government security (G-Sec) yield crossed the 7% mark, quoting at 7.05-7.07% as of 18 September, up from roughly 6.81% in mid-August and about 6.47% a year ago. As reported by Mint, the pressure is a mix of rising US yields, higher crude oil prices and a domestic market that anticipates that the Reserve Bank of India (RBI) will also start increasing interest rates. According to debt market experts, bond yields can potentially rise further from here and investors need to be cautious as a spike in yields would mean a fall in bond prices. The US national debt hit $40 trillion on August 19th, a psychologically significant number that has real costs to American taxpayers in the higher rate environment, while debt issuance in corporate and municipal markets is on pace for a record year in 2026. Equity sentiment has slipped only slightly into neutral territory, while bond-market sentiment has fallen to its lowest level since 2022, according to Ned Davis Research, as reported by Bloomberg. However, Indian government bonds ended higher on Monday after stronger-than-expected demand at the central bank's debt sale, with the benchmark 6.94% 2036 bond yield ending at 7.0497%, down from 7.0686% on Friday. The RBI sold bonds worth 250 billion rupees ($2.61 billion) earlier in the day, with the cut-off yields below market estimates, indicating a rising demand for these securities.
The bond market faces significant structural challenges beyond traditional interest rate movements. The supply of bonds has been rising because government debt and deficits are high, with debt-to-gross domestic product ratios already above 100% in the UK, France and the United States, and above 200% in Japan. A new source of bond supply is emerging from the technology sector, with large US technology companies, particularly the hyperscalers, issuing perhaps US$200 billion of debt over the past year, while companies involved in AI use cases have issued at least US$400 billion, according to Aberdeen Investments. Much of this borrowing is at the longer end of the curve, putting these companies in direct competition with governments for investors' money. Pension funds and life insurers have become less compelled to buy bonds after higher yields improved their funding positions, with defined-benefit pension funds that were previously in deficit moving into surplus, reducing the need to buy long-dated bonds to match liabilities. Central banks are also no longer buying debt like they used to, creating a straightforward market problem where more bonds are looking for buyers while some traditional buyers are becoming less active. The liquidity surplus has narrowed to 6.05 trillion rupees down from a record 11 trillion rupees reached earlier this month.
Most fund managers suggest staying at the short end of the curve—funds with a maturity or duration of under a year—because that segment is least sensitive to further spikes in yields. According to Gautam Kaul, senior fund manager-fixed income at Bandhan AMC, funds with shorter maturities are well-suited in the current market environment. Murthy Nagarajan, head-fixed income at Tata Mutual Fund, said conservative investors should be in up to the one-year segment, as all the yields-to-maturity (YTM) levels are above 7% due to rising bond yields. Within the sub-one-year space, experts point to the January-March 2027 maturity bucket for its balance of carry and roll-down, which limits price sensitivity while letting the portfolio reinvest at higher yields as they rise. For investors willing to take a slightly longer view, the rise in yields opens up opportunities further along the curve, with Pranay Sinha, senior fund manager-fixed income investments at Nippon India Mutual Fund, suggesting categories such as short-term and corporate debt funds for investors with a shorter horizon of at least six months. The Iranian conflict has continued to put pressure on energy prices and has become an almost entrenched part of the economic picture over the last six months.
Investors comfortable waiting out the initial volatility can look at the three-to-five-year segment, where Puneet Pal, head-fixed income at PGIM India Mutual Fund, said this part of the curve is better placed partly because the yield curve tends to flatten once the RBI starts hiking rates. ICICI Mutual Fund takes a contrarian view, stating that yields look attractive already and prefer adding long duration to fixed income portfolios given that rate hikes are fully priced in. The extreme long end, such as 30-year duration, also appears attractive at current levels, with yields already close to their long-run averages—the 15-year average since India adopted its inflation-targeting framework has been about 7.40%. However, longer-duration bonds are far more sensitive to yield movements and suitable for investors who can stomach some volatility. Apoorva Javadekar, Chief Economist at Shriram Group, believes the 2-year segment offers a relatively attractive entry point, while investors should remain cautious on long-duration bonds due to global rate pressures and domestic fiscal risks. Despite rising yields, strong earnings are helping to cushion the impact of higher yields, with S&P 500 companies expected to post their third consecutive quarter of more than 20% earnings growth when results arrive next month, according to Bloomberg Intelligence. The Cboe Volatility Index remains subdued, but the gap between index-level and single-stock volatility has risen to its highest level in more than a decade, indicating greater selectivity in equity markets.
