Investing in bonds in 2026? The outlook and strategy shift you can't miss

Axis AMC expects markets to shift towards a 'lower-for-longer' rate phase as tighter liquidity conditions set in

Investors in Indian bond markets must strategise for a stable rate environment in 2026 and not expect “outsized duration gains”, a report by Axis Asset Management Company (AMC) has said.

 

The wealth management company noted the markets had two themes in recent times: A duration rally supported by index inclusion and fiscal consolidation in 2024, and a liquidity-driven rally with steeper yield curves in 2025. In 2026, Axis AMC expects markets to shift towards a “lower-for-longer” rate phase as tighter liquidity conditions tighten.

Expected market shifts:

 

Stable interest rate regime: Axis AMC expects the Reserve Bank of India (RBI) to maintain an extended pause after a December 2025 rate cut, with minimal policy action through 2026 due to moderate growth and controlled inflation trends.

 

 

Liquidity normalisation: Surplus liquidity that dominated 2025 is expected to move towards neutral by March 2026 as currency leakage, foreign exchange interventions and deposit-linked Cash Reserve Ratio outflows absorb funds.

 

Flatter yield curve: With short-term rates likely to face upward pressure and long-term yields staying anchored, yields across maturities are expected to converge.

 

“These conditions reduce the possibility of outsized duration gains, making income-oriented strategies more suitable,” said the report.  ALSO READ | India likely to enter Bloomberg Global Index as FPIs give positive feedback

Accrual strategy: Focusing on steady income

 

Axis AMC said that short-tenure corporate bonds remain well placed for “accrual-focused investors” in 2026, particularly two-year AA corporate bonds, which the document highlights as preferred instruments for generating stable carry in a steady-rate environment.

 

Accrual works best when:

• Rates are unlikely to fall sharply 
• Liquidity is tightening 
• Short-term yields are firming up

The fund house expects this combination to play out through much of 2026.

Barbell strategy: Combining safety and tactical upside

 

Axis AMC recommends a barbell approach, mixing short-term corporate bonds for accrual with long-term government securities for selective duration exposure.

 

Long bonds are trading around 7.4–7.5 per cent, offering a “compelling safety cushion” for long-term investors.

 

Potential inclusion of Fully Accessible Route bonds in the Bloomberg Global Aggregate Index could attract USD 25–30 billion in inflows, supporting demand for long-duration securities.

 

RBI open market operations (OMOs) of up to Rs 2 trillion may further stabilise supply and demand in long bonds.

 

Together, these factors make long-duration G-Secs a viable complement to short-tenor corporate bonds within a barbell setup.

Risks investors should watch

 

The AMC flags three key risks:

• Higher-than-expected government borrowing in FY27 
• Prolonged weakness in domestic growth 
• A delay or rejection of India’s inclusion in Bloomberg’s global indices 
• Each of these could affect yields or curve shape through 2026.

Takeaway

 

Axis Asset Management’s 2026 outlook suggests that the bond market will reward investors who prioritise stability over speculation. With rates expected to remain steady and liquidity tightening, accrual strategies and barbell portfolios, as recommended in the Axis AMC, may help investors capture predictable income while retaining some room for tactical upside.

 

This shift marks a move from chasing rallies to building resilient, income-oriented portfolios suited to a maturing market landscape.