Rally in long bonds nears end as key drivers weaken, says Axis AMC

Axis AMC warns that the rally in long-duration bonds may be over amid weak demand-supply dynamics, policy shifts, and reduced scope for aggressive rate cuts

The nearly 15-month rally in long duration bonds is likely over unless a slowdown in economic growth triggers aggressive rate cuts or the bonds get included in new global indices, Axis AMC said in a note on Tuesday.

 

"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 at Axis Mutual Fund.

 

In 2025-26 (FY26), the demand for long duration bonds (10 years and above) is estimated at ₹10.8 trillion and supply of nearly ₹12 trillion worth of central government and state development loans (SDLs) of 15-50 year maturity, according to the note.

 

In addition, the demand is likely to take a hit from the revised held-to-maturity (HTM) guidelines for banks, hike in equity allocation of national pension system (NPS), and restriction on incremental foreign portfolio investment (FPI) in securities beyond 14 years under the fully accessible route (FAR). 

 

Other key drivers behind the rally have also weakened. The Reserve Bank of India's (RBI's) shift to a stance signals that aggressive rate cuts are unlikely. The fiscal consolidation witnessed in recent years is also nearing its limits, the report said.

 

Going by the past trend, any significant decline in yields of longer dated bonds from the 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.