The situation has been further compounded by political instability following the resignation of the Prime Minister, which has rattled investor confidence and triggered volatility across asset classes.
According to Abhishek Bisen, Fund Manager at Kotak Mutual Fund, this sharp rise in Japanese yields has also accelerated the unwinding of the yen carry trade—a strategy that has long provided abundant liquidity to global markets.
As investors recalibrate their positions, the ripple effects could reshape capital flows, particularly in developed economies such as the U.S., and set the tone for bond markets worldwide. Edited Excerpts –
Q) With the U.S. imposing new tariffs and global trade tensions rising, how are bond yields reacting, and what does it mean for fixed income investors?
A) The US tariff on Indian goods took effect on 27th Aug’2025 at 50% (from 25%) which is on the upper end of tariffs imposed as compared to other countries. While the 10-years and 30-years Indian government bond yield rose in last couple of weeks and the rupee has depreciated to an all-time low breaching the 88 mark.
The rise in Indian Government bond yield cannot be solely attributed to US tariff. There were many factors at play such as GST rationalisation announced on 15th Aug, demand – supply dynamics on long end of curve especially from state governments etc.
Given the increased probability of the Fed rate cut this month, limited impact of GST rationalisation on fiscal and India’s headline inflation below 2%, we expect likely fall in longer dated government bond yields leading to capital appreciation.
Q) U.S. bond yields remain elevated—are we entering a “higher-for-longer” regime, and how should Indian debt investors position themselves?
A) The US bond yields have been falling since last few months. We have moved past the “higher-for-longer” regime. The market is expecting the Fed to cut its benchmark rate in its upcoming 17th September policy.
Moreover, the Indian economy posted a growth of 7.80% in Q1FY26, though the growth is likely to moderate in the coming quarters.
Nonetheless, India has strong macro fundamentals, and the finance minister is expecting the fiscal deficit for FY26 to remain unchanged at 4.40% of GDP despite reforms in GST tax structure with lower rates.
Moreover, the FY26 inflation target by RBI has been reduced to 3.10% from 3.70% in August 2025 policy. GST rationalisation from 22nd Sept is further expected to ease headline inflation in India.
Considering these factors, we expect the bond yields to fall going forward and recommend investors to add duration to their portfolio.
Q) Japan’s long-term government bond yields have surged to multi-decade highs. How significant is this shift for global capital flows and risk sentiment?
A) The resignation of Japan’s PM has led to political instability and economic uncertainty. The longer dated Japanese bonds yields are trading at record levels and there is concern regarding the debt levels which is around ~250% of GDP, one of the highest among the developed nations.
Moreover, the recent carry trade unwinding will likely impact the bond yields globally especially in the developed markets such as USA hence the capital flows may get impacted to that extent.
However, the upcoming policy meeting of Bank of Japan will set the tone for the market participants going forward.
Q) Do you see rising developed market yields impacting foreign inflows into Indian debt markets, especially with India’s inclusion in global bond indices?
A) We have seen FPIs have been withdrawing money from the Indian equity markets, and the current geopolitical uncertainty has negatively impacted the INR as well.
Ideally, given the elevated UST and rising IGB yields, volatile INR and geopolitical uncertainty India should have witnessed outflow, on the contrary India bonds saw decent inflow over last month.
Further given sovereign rating upgrade to BBB by S&P and expected inclusion in the more global bond indices in medium term, we expect the flows to continue.
Q) For investors looking at fixed income, is it wiser to lock into long-duration bonds now or stay short given the uncertain global rate environment?
A) Currently, the yield curve is steep i.e the longer end of the yields are relatively higher despite strong macro fundamentals. Thus, we believe that the longer dated bonds are undervalued and attractive on the yield curve.
Recently, the finance minister acknowledged that the bonds yields are elevated despite low-interest rate environment.
Given the current uncertain environment and the recent likely rate cut in the US, we expect the Indian bond yields to ease, fixed income investors may increase duration in their portfolio for longer dated bonds, though due to global events there may be uncertainty in short term.
Q) How should investors balance between sovereign bonds, corporate bonds, and new-age fixed income products like private credit AIFs in the current scenario?
A) Sovereign bond yields are driven by macro factors unlike corporate bonds which largely depend on the idiosyncratic factors. Private credit may offer higher yields depending on the financing structure and the quality of borrower.
Given India’s strong macro conditions and the longer dated bonds being undervalued and attractive on the curve, we recommend investors to have higher allocation to sovereign bonds.
However, the asset allocation across the asset classes will depend on the investors risk, return, time horizon, taxes, legal, liquidity, and other factors.
Q) Are inflation risks largely behind us, or could tariffs and supply-side shocks reignite yield volatility in the coming quarters?
A) The headline inflation in India has been currently below 2%. However, the RBI in its August monetary policy projected the inflation for FY26 at 3.10% and for Q1FY27 at 4.90%.
However, after the recent GST rationalisation is likely to bring headline inflation down by 50~100 bps, we expect the inflation to be moderate for FY26 as well as Q1FY27 as compared to the RBI forecast which may raise the odds for rate cut in India which bodes well for IGB’s.
However, given the current uncertainty around tariffs and uncertain global environment, the yields are likely to remain volatile.
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