Indian government bonds fell on Thursday, pushing yields higher, as crude oil prices resumed their upward trajectory amid renewed uncertainty over the durability of the US–Iran ceasefire.

The benchmark 6.48% 2035 bond yield rose by 4 basis points to 6.9407%, compared to 6.8984% in the previous session, when it had recorded its sharpest single-day decline in nearly four years.

Crude oil prices rebounded, with the Brent crude contract rising 2.93% to $97.53 per barrel. The increase follows its steepest daily drop since April 2020, as optimism around a sustained truce weakened after Iran termed it “unreasonable” to proceed with negotiations for a permanent peace agreement amid renewed tensions.

Meanwhile, the Reserve Bank of India (RBI) kept the repo rate unchanged on Wednesday, while flagging upside risks to inflation due to elevated crude prices and potential shortages of key inputs such as gas.

Bond yields had risen sharply in March since the onset of the US–Iran war, with the benchmark 10-year bond yield touching a high of 7.13%. However, in the previous session, yields softened across the curve, amid optimism over the US-Iran ceasefire, alongside a broadly reassuring policy stance from the central bank.

Anil Bamboli, Head of Fixed Income at HDFC AMC, noted that despite heightened global uncertainty, the medium-term outlook for Indian fixed income remains constructive, as markets have largely priced in prevailing risks.

Market participants had widely anticipated a status quo on policy rates, though concerns persisted regarding the tone and stance of the central bank amid uncertainties surrounding the duration and intensity of geopolitical tensions in the Middle East.

Following the policy announcement, yields in the corporate bond market eased by 10–15 basis points across tenors. The CP-CD market also witnessed easing across the curve by around 20 basis points, with sharper declines in the three-month segment, particularly in new issuances. Secondary market activity remained concentrated in the five-year segment, according to Priyashis Das, CEO of Altifi by Northern Arc.

Going forward, the trajectory of crude oil prices will remain a key determinant of bond yields in India. Analysts believe that the Monetary Policy Committee may maintain a prolonged pause if crude prices stay below $90 per barrel.

Bond Market Strategy

Amid ongoing geopolitical uncertainties and the RBI’s data-dependent approach to monetary policy, Das recommends a barbell investment strategy — allocating predominantly to short-term and long-term bonds while avoiding medium-term maturities.

“In the overall portfolio perspective, investing in short-term bonds helps to reduce overall interest rate risk along with providing liquidity. Whereas the long-term bonds provide higher yields and potential benefit if interest rates fall,” said Das.

Such approach keeps the investors’ portfolio protected as well as positioned for gains, with an added reinvestment advantage wherein short-term bonds post their maturity can be reinvested at better yields in case interest rate rises, he added.

Das further advised a staggered investment approach, wherein investors deploy capital gradually into bonds or debt funds rather than making lump-sum allocations. This strategy can help manage risks arising from geopolitical volatility, smoothen interest rate exposure, and improve yield averaging.

Puneet Pal, Head of Fixed Income at PGIM India Asset Management, expects the yield curve to steepen amid surplus liquidity and ongoing market recalibration of the rate cycle. He projects the 10-year bond yield to trade within a range of 6.75% to 7.10% over the next couple of months.

He recommends that investors consider short-duration money market funds with maturities of up to one year, given the currently attractive yield levels from a historical spread perspective. For investors with a horizon of more than 18 months, short-duration corporate bond funds (2–3 years) offer a favourable risk-reward profile, he added.

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