Carry, Credit & Convexity: A balanced bond investing strategy for FY26

With inflation at a low ebb, growth steady and global central banks nudging toward ease, India’s bond market is offering a rare window. The strategy? Lock in carry, dial in selective credit and keep a modest long-duration tilt.

Macro & Global Backdrop

India’s inflation engine is cooling—headline CPI at 1.54 % in September—while growth remains resilient at ~7.8 % in Q1 FY26. That gives the Reserve Bank of India (RBI) ample policy ammunition to stay supportive. Globally, the Federal Reserve appears poised for further cuts, the European Central Bank is already easing, and the Bank of England is cautiously waiting. The result: falling global term premiums that play into India’s duration story.

Market Snapshot

The new 10-year G-Sec yield trades near 6.40% – 6.50%, while short-to-mid maturities (3-5 years) linger in the 5.80% –6.20% band. Corporate spreads for AA/AAA are still generous, and new-issue volumes continue to rise. With carry intact and the “certainty of income” strong, the fixed-income setup is compelling.

Strategy: Barbell with a Credit Twist

Core (3-5 years): Focus on high-quality G-Secs and AAA/AA PSU/financial bonds to lock in carry and minimise duration risk.

Credit Tilt (2-3 years): Add measured exposure to high-yield credit (AA- to A- rated companies) that offer incremental spread pick-up with solid fundamentals. Selectivity is essential.

Moderate Long Duration (10-15 years): Keep a modest long-dated G-Sec component for convexity — a high-reward tilt if global term-premium compresses further.

This tri-tier structure blends carry, credit alpha and a tasteful dose of long-duration upside — all while managing risk.

Credit Beyond the Safe Zone

High-quality credit, often overlooked amid low yields, deserves attention now. With improved liquidity and structural tailwinds (FPI reforms, better disclosure), the AA- to A- segment offers one of the few spots for genuine spread pickup. The caveat: focus on issuers with strong balance sheets, stable cash flows and maturities that don’t stretch into refinancing risk zones.

Risks to Keep on Your Radar

• Heavy issuance: A deluge of state or PSU debt could push yields higher or widen spreads.
• Global shock: A sudden spike in U.S./Japan long-term yields could ripple into Indian markets.
• Inflation surprise: A reversal in food or commodity inflation could derail the benign view.
• Credit misstep: Slips in weaker sectors (NBFCs, unhedged infra) may dent confidence in the broader credit market.

Outlook

The setup for Indian fixed income is unusually favourable: stable growth, subdued inflation, and global policy easing. Investors should capitalise on this by anchoring in carry, layering in select high-yield credit, and retaining a calculated long-duration slice. It’s not about chasing risk—it’s about smart deployment in a moment when the market is willing to pay.

(Author Chirag Doshi is Executive Director and Chief Investment Officer (CIO) of LGT Wealth India.)

Disclaimer: This story is for educational purposes only. 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.