Amid heightened market volatility, falling gold prices since the onset of the US-Iran conflict, and a hit to investors’ risk appetite, Investors appear to be grappling with a key question: Is it the right time to increase exposure to government bonds?
The has increased macroeconomic risks, with rising oil prices fuelling concerns over a spike in inflation and the possibility of tighter monetary policy globally. This has created an environment of elevated uncertainty. There is also growing speculation that even after the Middle East conflict is resolved, the impact of the energy shock may persist for some time.
The prevailing environment appears suitable for bond investors. However, before buying them, one must understand how they function and whether it is the right time to buy them.
Understanding bonds and bond yields
One of the thumb rules of successful investing is to maintain a well-diversified, all-weather portfolio.
Of course, portfolios should be periodically rebalanced in line with evolving market conditions, and investors may need to increase or reduce exposure to certain asset classes over time. However, a portfolio comprising equities, gold, and bonds is generally considered an ideal foundation for long-term investing.
But what are bonds?
Simply put, a bond is similar to a loan. The issuer takes money from an investor and offers a certificate, a bond. The yield is the interest investors earn on that loan. So, you buy a ₹100 bond and the interest you get on it is the bond yield.
Bonds are issued with a fixed coupon rate, or the interest rate. This means that the yields should always remain the same. But that’s not the case.
When a bond is listed and traded in the market, its yield changes with the market’s conditions.
Let’s understand it with an example.
Suppose you buy a bond with a face value of ₹100 and a coupon rate of 6%. This means the yield will be ₹6.
Now, suppose due to changed market conditions, the demand for that certain bond has risen. What will it do? Increased demand will raise the price of that bond, and the price of that ₹100 bond may now be ₹110 in the bond market.
Since your coupon rate is fixed at 6%, your return on that same bond will remain ₹6. This means you will earn ₹6 by investing ₹110 in the bond, so the yield is now lower, around 5.45%.
This is why bond prices and yields move in opposite directions. When bond prices rise, yields fall, and when bond prices fall, yields rise.
Why do bond prices rise or fall?
Bonds react to macroeconomic conditions. Bond prices and interest rates move in opposite directions.
When interest rates rise, the prices of existing bonds fall. Why?
Suppose you buy a bond with a 6% coupon rate (interest rate). When the RBI increases interest rates, bonds issued after the rate hike may offer 8% interest, as the coupon rates of newly issued bonds will reflect the current interest rate environment.
This means investors will prefer new bonds that will yield 8%. To make the older 6% bond attractive, its market price must fall.
Is it the right time to buy government bonds?
With inflation risk rising, the is expected to hike interest rates in the near future. And that is why experts say wait at least till the RBI’s June policy meeting before buying any government bond.
“Any decision to buy government bonds should wait until the imminent RBI policy announcement on 5th June,” said Vishal Goenka, Co-founder, Indiabonds.com.
Goenka underscored that the last policy was on 8th April and a lot has changed since then with the ongoing global geopolitical situation, its sustained higher impact on oil prices and underlying inflationary pressures in the economy.
Moreover, buying government bonds also depends on duration and tenor.
According to Goenka, a relatively safer play would be in the 5-year segment today, as the short and long ends of the bond yield curve would react more to any rate hikes.
Paresh Bhagat, CIO of Veer Growth Fund (AIF), and Chairman at Mangal Keshav Financial Services, pointed out that government bonds offer safety, but not necessarily good returns at current levels.
“With 10-year yields around 7%, an aggressive shift toward long-duration government bonds is not recommended right now,” said Bhagat.
“A 7% yield means buying a government cash stream at roughly 14 times earnings. That seems reasonable compared to stocks, but there’s an important difference. Stock earnings grow over time. Bond returns depend on interest rate and inflation movements. When yields rise, bond prices fall, creating losses,” Bhagat explained.
“Government bonds remain safe in terms of credit risk. If a 7% risk-free return is acceptable, they’re worth holding. But long-duration bonds don’t offer compelling value at this point. Shorter- to medium-duration debt is preferable, with a wait for more clarity on inflation, oil prices, government spending, and RBI policy before extending duration further,” Bhagat added.
However, if the RBI succeeds in arresting the rupee’s fall and inflation remains contained, rate hikes could be delayed, keeping government bonds attractive.
Shruti Jain, Chief Strategy Officer at Arihant Capital Markets, highlighted that since January 2025, the RBI has cut rates by a cumulative 125 basis points, from 6.50% all the way down to 5.25% currently. This has been the most aggressive easing cycle since 2019. The repo rate has been on a deliberate pause this year.
Jain believes this could be a good time to explore investments in Indian government bonds, especially for long-term investors who want stability, predictable income, and potential capital gains if interest rates fall further.
“Currently, the 10-year government bond yield is around 6.8–6.9%, which is attractive. Rising crude oil prices remain a risk for India. However, India is well-positioned to contain inflation, and with the RBI aggressively intervening in forex markets to defend the rupee, it brings comfort on the inflation front,” said Jain.
“A growing economy with stable tax revenues means the government is less likely to face stress in servicing its debt. This reinforces the safety of sovereign bonds,” Jain added.
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Disclaimer: This story is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.