From conflict to curve: How rising yields hit debt funds — and where opportunity lies

Subscribe to enjoy similar stories.The 10-year government securities yield climbed from 6.68% on 27 February 2026 — a day before the US-Iran conflict broke out — to 7.1% by 2 April, before easing slightly to 6.98% as of 13 April.The spike has pushed long-duration debt mutual funds into negative territory, with the category down an average 1.11% since the war began.Long-duration funds, classified by the Securities and Exchange Board of India (Sebi) as those with a Macaulay duration of more than seven years, are among the most interest rate-sensitive debt fund categories. When rates fall, bond prices rise and investors gain; when rates rise, the reverse happens, leading to mark-to-market losses.

The higher the duration, the sharper those swings tend to be.The backdrop was already fragile before the conflict.At the start of 2026, markets were pricing in two rate cuts by the US Federal Reserve during the year. By mid-March, that view had fully reversed.

Expectations shifted to a prolonged pause — and even to the possibility of a rate hike.That recalibration unsettled bond markets globally, including India. When geopolitical escalation followed in late February, crude oil prices surged, stoking fears of higher energy-driven inflation and potentially delaying any rate relief.Still, some fund managers see opportunity in the sharp rise in yields.“With 30/40-year yields around 250 basis points above the repo rate, the long end of the curve offers an opportunity,” said Akhil Mittal, senior fund manager — fixed income, at Tata AMC.

“The yield curve is very steep at this point.”However, timing remains uncertain. “As long as geopolitical tensions persist, there may not be an immediate trigger for yields to soften.