India’s bond market saw renewed pressure in the second half of April, with the benchmark 10-year government security (G-sec) yield rising 14 basis points to 7.02%, even as debt mutual fund performance remained mixed across categories. The move reflects a combination of global headwinds, rising crude oil prices, and foreign capital outflows, according to the latest monthly update by Edelweiss Mutual Fund .

The uptick in yields comes at a time when inflation concerns are resurfacing. Brent crude prices climbed sharply to around $114 per barrel during the period, driven by escalating tensions in West Asia and fears of supply disruptions. Higher oil prices typically translate into inflationary pressures for import-dependent economies like India, pushing bond yields upward.

Domestic debt markets

Global cues also weighed heavily on domestic debt markets. The US 10-year Treasury yield rose to 4.39%, reflecting sticky inflation and reduced expectations of rate cuts by the Federal Reserve. This has narrowed the yield differential between Indian and global bonds, making domestic debt less attractive for foreign investors and triggering outflows.

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Foreign portfolio investors (FPIs) remained net sellers in April, pulling out nearly ₹60,847 crore from equities and ₹10,826 crore from debt markets. The sustained outflows have added to pressure on bond yields and currency stability, reinforcing cautious sentiment among market participants.

Debt fund performance diverges

Against this backdrop, debt mutual fund categories delivered mixed returns. Short-duration and long-duration funds faced mark-to-market losses due to rising yields, while liquid and ultra-short duration funds remained relatively stable, supported by accrual income.

Data from the report shows that categories such as gilt funds and banking & PSU funds experienced negative short-term returns, reflecting sensitivity to interest rate movements. In contrast, liquid and money market funds continued to offer steady, low-volatility returns, making them relatively resilient in a rising yield environment.

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Short-term rates and liquidity trends

Short-term money market rates also edged higher during the fortnight, with certificates of deposit (CDs) and commercial paper (CP) yields rising across maturities. This was driven by expectations that interest rates may remain elevated for longer amid global uncertainty.

However, systemic liquidity remained in surplus, which helped limit volatility in short-term funding markets. The Reserve Bank of India’s liquidity support measures, along with expected fiscal spending and dividend transfers, could further ease liquidity conditions in the coming months.

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Corporate and state bond markets under pressure

Corporate bond yields hardened across maturities as issuers turned cautious in the face of geopolitical risks. The widening of credit spreads and a steepening yield curve indicate increasing risk aversion among investors.

Similarly, yields on State Development Loans (SDLs) rose due to higher borrowing requirements by states and subdued participation from foreign investors. Currency concerns and global yield movements further contributed to the upward pressure.

Outlook

Market participants expect volatility in the fixed income space to persist in the near term. Key triggers to watch include crude oil prices, global interest rate trajectories, and geopolitical developments.

While rising yields may pose short-term challenges for debt funds, they also improve accrual opportunities for investors with a medium- to long-term horizon. For now, the environment remains a balancing act between global risks and domestic liquidity support, with bond markets navigating a complex macro landscape.

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Published on: May 6, 2026 2:30 PM IST