If you’ve been wondering how to approach bond investments over the next couple of years, 2026 might actually turn out to be an interesting point on the curve. Recent insights from Axis AMC suggest that the bond market is moving into a calmer, more predictable phase, something many investors have been waiting for.
So, what’s changing?
1. Interest rates may stay steady for a while
Axis expects the RBI to possibly cut rates by the end of 2025 and then hold them steady. With inflation under control and growth staying moderate, we may not see the kind of big rate swings we’ve seen in the past.
2. Liquidity won’t stay as loose as before
A lot of the excess liquidity floating in the system is expected to shrink by early 2026. That’s important because when liquidity tightens, sharp bond rallies also become less likely.
3. The yield curve could flatten
Short-term rates may edge up while long-term yields remain stable. This means long-duration bets may not give the same punch as they do when the curve is steep.
What this means for your strategy
Shift the focus to income, not speculation
- Axis AMC is nudging investors toward a more grounded approach — one that prioritises steady income over trying to time big rallies.
- Short-term corporate bonds, especially 2-year AA-rated ones, look appealing right now. They offer a decent yield without taking on unnecessary interest-rate risk. If you like predictable returns, this is where the spotlight is.
A barbell approach could work well
This strategy mixes two ends of the spectrum:
- Short-term corporate bonds for regular income
- Long-term government securities (G-Secs) for stability and selective long-duration play
Long-term G-Secs, currently yielding around 7.4%–7.5%, offer a good safety cushion. Plus, if Indian bonds continue moving toward global index inclusion, long-duration securities could enjoy steady demand from foreign investors.
The risks you shouldn’t ignore
No investment view is complete without understanding what could go wrong:
- The government may borrow more than expected in FY27 — which could push yields upward.
- Domestic growth may soften, limiting long-duration opportunities.
- If Indian bonds don’t make it into global indices as planned, expected inflows may not come in.
These may not derail the entire outlook, but they’re important to keep in mind. Final thoughts
2026 looks less like a “chase the rally” year and more like a “build steady income” year for bond investors. The environment is supportive of portfolios that are balanced, predictable, and less dependent on sudden rate moves.
If you’re planning your bond allocation for the next couple of years, this might be the right time to think about moving toward income-focused strategies — and using a well-designed barbell portfolio to balance both confidence and caution.
Here’s a more human, natural, non-AI sounding blog — simple, clear, and written in a conversational yet professional tone:
Why Banks Are Suddenly Raising So Many Tier II Bonds
If you’ve been following financial news lately, you may have noticed a clear trend: India’s biggest banks are quietly but steadily issuing large amounts of Tier II bonds. It’s not a coincidence, nor is it just another fundraising exercise. There’s a deeper story behind why this is happening now — and why it matters.
First, What Exactly Are Tier II Bonds?
Think of Tier II bonds as a safety cushion for banks. Under the Basel III norms, banks must maintain certain capital levels to stay strong during uncertain times.
Tier II bonds help them do exactly that.
They:
- Boost the bank’s overall capital strength
- Don’t dilute shareholders’ equity
- Come at a lower cost compared to many other funding routes
- Provide long-term stability because they have a minimum 5-year lock-in In simple terms, these bonds give banks breathing room when things get rough.
Why the Sudden Spike?
There’s a perfect mix of factors working in banks’ favour right now:
1. Investors Want Long-Term, Stable Returns
Big institutions — pension funds, insurance companies, provident funds — are hunting for long-duration, high-quality instruments. Tier II bonds fit that need perfectly. With many companies issuing shorter-term bonds this year, these bank bonds are getting even more attention.
2. Interest Rate Expectations Are Changing
There’s growing talk that the Reserve Bank of India may cut rates in the coming months. If that happens, borrowing later might be more expensive for banks.
So, locking in long-term funds today makes financial sense.
3. Recent Successful Issuances Have Boosted Confidence
SBI recently raised ₹7,500 crore at a very attractive rate — setting a benchmark and encouraging other banks to follow suit. When the biggest player gets such pricing, others naturally feel confident stepping in.
4. Regulatory Needs Are Also in Play
To comply with capital norms, banks must keep strengthening their buffers. Some of them are also replacing older bonds whose call options have been exercised. So, part of this surge is simply good housekeeping.
How Much Money Are We Talking About?
- Banks are expected to raise around ₹25,000 crore through Tier II bonds this year, and nearly ₹10,000 crore has already been raised.
- SBI, ICICI Bank and a few others have already tapped the market, and more issuances are expected soon.
Are There Any Risks?
Yes, a few:
- Tier II bonds are subordinated, meaning they sit lower in the repayment order during distress.
- Banks cannot rely solely on these bonds for capital — equity still matters. ∙ If market conditions turn volatile or yields rise abruptly, issuances may become costlier.
But for now, the environment is still friendly.
The Bigger Picture
The surge in Tier II bond issuance isn’t about panic or pressure — it’s about preparation.
Banks are using a favourable window to strengthen their balance sheets, refinance expensive debt, and get ahead of future regulatory needs.
This proactive approach helps them stay stable, support credit growth, and be better prepared for any economic uncertainty that lies ahead.
In short, these bonds are helping banks quietly build the foundation for a stronger financial system.
Cover image reference: https://img.freepik.com/free-photo/business-infographics-hologram-made-by-man_23-2148755139.jpg
