Volatile Stock Market and Declining Gold Prices Raise Questions: Is Long-Term Government Bond Investing a Prudent Strategy Now?

Market Volatility Spikes Amid US-Iran War

The ongoing US-Iran conflict has sent shockwaves through global equity markets, causing significant fluctuations in gold prices and crude oil prices. This has led to a decline in most asset classes, with investors scrambling to protect their investments. The equity benchmark Nifty 50 has crashed by 10%, while domestic spot gold prices have dropped by 8% since the US-Iran war began on February 28.

The volatility in the stock market and gold prices has shifted focus towards government bonds, which are seen as relatively more stable than these two asset classes. At the current juncture, long-term government bonds are becoming attractive due to high yields. India's 10-year government bond yields are around 7%–7.2%, which is one of the best levels seen in recent times. When yields are high, bond prices are low, making it an ideal time for investors to enter the market.

However, a key variable to consider is monetary policy, as the risk of inflation has risen due to elevated crude oil prices driven by the US-Iran war. Several experts believe that the current trajectory gives a high probability of 50-75bps rate hikes this year, which could impact the FY27 outlook for bonds.

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Bond Market Outlook

According to Harshal Dasani, Business Head at INVasset PMS, the current environment presents an opportunity for investors to lock in relatively high sovereign yields for an extended period. Dasani highlighted that India's fiscal consolidation path remains intact, creating a favourable risk-reward setup for long-term investors.

Darshan Rathod, COO at Multyfi, emphasized that higher yields on long-term bonds, anticipation of RBI rate cuts, and low volatility have made long-term government bonds more attractive. Rathod noted that once inflation comes under control and global pressure reduces, the RBI may start cutting rates, causing bond yields to fall and prices to rise.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

While some experts believe that this is a good time to start increasing exposure to long-term government bonds, it is essential to note that risks still exist, especially if crude oil remains high. A 3-5 year mindset and staggered accumulation in long-term government bonds are recommended to benefit from both income and future price upside.