How to rebalance your debt portfolio as bond yields rise

Record govt borrowing, tight liquidity have pushed bond yields higher, raising price risks

- Jash Kriplani

The yield on 10-year government securities has risen 10 basis points over the past month, raising concern among investors, as higher yields typically translate into lower bond prices.

Yields have hardened after the Reserve Bank of India (RBI) left policy rates unchanged and refrained from announcing fresh liquidity measures in its latest monetary policy meeting.

Market participants expected RBI to bring liquidity support after FY27 budget unveiled record borrowing of ₹17.2 trillion to fund government spending.

Higher borrowing usually leads to an increased supply of government securities, leading to higher yields with basic supply-demand dynamics at play. With yields firming up, fund managers say debt fund investors need to strike a careful balance in their portfolios to guard against further upside risks.

Caution on duration

Most experts are advising investors to stay in short-duration, accrual-oriented strategies, where returns are driven primarily by interest income rather than capital gains. This is also because expectations of another rate cut in 2026 have largely faded for now.

Manish Banthia, chief investment officer, fixed income, ICICI Prudential Asset Management Co recommends investing in the liquid-plus segment that includes funds of up to two years’ duration. “This includes floating-rate funds, low-duration funds and money market funds,” he said.

Liquidity tightness has pushed up spreads on one-year commercial papers (CPs) and bank certificate of deposits (CDs) and two-year corporate bonds, making this segment attractive from a risk-reward perspective, he said.

Liquid-plus funds typically include debt categories such as money market funds, low-duration funds, and ultrashort funds. Some fund houses may also run short-duration strategies in floating-rate funds.