Why Invesco MF's Vikas Garg sees a tactical opportunity in long-duration debt funds

Bond yields in India have risen sharply this year, with government securities (g-secs) climbing around 50 basis points amid a mix of concerns — elevated crude oil prices fuelling inflation fears, a potentially wider fiscal deficit due to a costlier import bill, and growing speculation that the US Federal Reserve may raise interest rates. The shift has unsettled debt markets globally. But against this backdrop, Vikas Garg, head of fixed income at Invesco Mutual Fund, believes longer-duration funds may now offer a tactical opportunity, particularly if the West Asia war shows stronger signs of de-escalation. He also explains how investors can position debt portfolios in the current environment. Edited excerpts: Bond yields have risen sharply in the past two months. Is the worst behind us? Much of the bad news is already reflected in prices. Government bond yields are up about 50 basis points, and corporate bond yields have risen even more nearly 90 to 100 basis points (when yields rise, bond prices fall, and vice versa). That is a significant move in a short period. The West Asia war has now been running for close to 90 days, and the stakes for the global economy are very high. At this point, I believe yields are more likely to decline from current levels than rise further. Any positive development on the geopolitical front could trigger a fairly quick recovery in bond markets. Markets are also worried about a US Federal Reserve rate hike. How would that affect India? At the start of this year, markets were expecting rate cuts from major central banks, including the US Federal Reserve. That picture has changed considerably. Markets are now pricing in at least one rate hike over the next year, and US Treasury yields have already risen 60 to 65 basis points in just two months. A June hike is not our base case — we expect the Fed to wait and watch — but if it does materialize, it would put pressure on bond markets globally. For India, a rate hike in the US tends to strengthen the dollar, which weighs on the rupee. A weaker rupee makes imports more expensive, keeps inflation elevated, and gives the Reserve Bank of India less room to ease — which means domestic bond yields stay elevated for longer. How are you positioning your funds in this environment? It has been a challenging environment to navigate. Over the past two months, we have positioned portfolios for a scenario where short-term yields rise more than long-term yields — and that is broadly what has played out. Three-year corporate bond yields have risen sharply, while 10-year government bond yields have moved up comparatively less. Given this, we are slightly cautious on funds with shorter maturities — those under one year — and are running slightly lower duration there. In longer-duration funds, however, we are relatively more comfortable holding duration, as we believe the long end of the yield curve remains better protected in the current environment. Is there a tactical opportunity in long-term government bonds right now? Yes, particularly for investors with a tactical view. Yields on 15-year and 30-year government securities are currently at multi-month highs. If there is even partial progress on the geopolitical front — a ceasefire or meaningful de-escalation — the long end of the curve could see a sharp rally. Long-duration gilt funds therefore look attractive at current yield levels. That said, this opportunity is contingent on how the geopolitical situation evolves, and investors should factor that uncertainty into their decision. How long does this tactical window remain open? If this opportunity were to play out, it would be in the first half of FY27. As things stand, government bond supply is relatively contained at the long end during this period, and many market participants are currently under-positioned on the duration bet. If sentiment improves even modestly, it could translate into a sharp and swift move in bond prices. The second half of the year could become more challenging — as the increased bond supply overhang may remain if West Asia tensions persist longer and expectations of a rate action move closer. Why does crude oil matter so much for Indian bond markets? Crude oil is possibly the single most important variable for India, given our dependence on imported energy. Every $10 rise in oil prices adds roughly 40 to 45 basis points to headline inflation and widens the current account deficit. The RBI's inflation projections for FY27 are premised on crude averaging around $85 per barrel — prices are currently well above $100. If oil remains at these levels for an extended period, inflation stays sticky, the rupee stays under pressure, and the RBI has limited flexibility to support growth. Our base case is that prices correct as geopolitical tensions ease, but this remains the most critical variable to monitor. What should debt fund investors do at this point? The silver lining in this environment is that yields have risen enough to make entry points genuinely attractive. Several debt funds are currently offering yields in the range of 7.5% to 8% — a level that provides meaningful accrual (accrual refers to the returns investors can earn simply by holding the fund to its average maturity, regardless of price movements). For conservative investors or those with shorter time horizons, money market funds, ultra-short duration funds and low-duration funds offer a reasonable balance of return and stability. For investors with a horizon of six months or more, short-term bond funds and corporate bond funds present a compelling case. Corporate bond spreads over government securities are considerably wider than historical averages, providing an added buffer. And for investors with a higher risk appetite and a tactical view, long-duration gilt funds offer an attractive opportunity at current yield levels, though the outcome will depend significantly on how the geopolitical environment unfolds.