The ‘not-so-fixed’ nature of fixed income markets

The roots of what we now call fixed income go back at least 250 years, when the British government issued “Consols”—a type of perpetual bond used to finance wars. These bonds had no maturity date and paid fixed coupons indefinitely, until redeemed by the government.

The term gained prominence with the advent of modern portfolio theory in the 1950s, when economists like Harry Markowitz developed frameworks around diversification and risk. These theories clearly distinguished between ‘equities’ (stocks) and ‘bonds,’ the latter defined by their steady, fixed returns. Over time, as large asset management firms grew in influence, “fixed income” became a standard industry classification, covering bonds and a wide range of debt instruments.

Many investors take the term at face value, assuming bonds or debt-based funds are inherently low-risk. “Fixed income” feels comforting, as if one is promised consistent returns regardless of market conditions.

But today, this assumption doesn’t hold.

Also read: How you can invest in a fully valued market

Reality check

While the core principles remain, the fixed income landscape has changed dramatically. Financial markets today are more complex, interconnected, and reactive. Innovations in debt instruments, investment vehicles, and valuation models (like mark-to-market and NAV) have introduced a layer of volatility.

What was once considered the domain of stable returns now exhibits price and yield fluctuations akin to equities. Variables such as changing interest rates, shifting credit spreads, and evolving liquidity conditions can all disrupt the “fixed” nature of returns.

When bonds behave like stocks

Take the example of Austria’s 100-year bond issued during the Covid-19 pandemic, which offered a 0.90% yield. As global rates rose over the next three years, the bond’s price crashed from €135 to €33—wiping out around 75% of investor value.

Closer home, Indian gilt mutual funds reported a yield-to-maturity (YTM) of 7.30% in April 2024. But falling interest rates boosted returns to 11% over the year. Similarly, a 30-year Indian government bond jumped from ₹98 to ₹107 in early 2025, delivering a 16% gain.

‘Not-So-Fixed’ isn’t necessarily a bad thing

Volatility isn’t always a drawback. In fact, it creates opportunities to manage risk and enhance returns—provided you understand the levers at play.

What investors should watch for:

Central bank cues and bond duration: Rising rates mean better reinvestment opportunities via newer, higher-yielding bonds. Falling rates can lead to capital gains in long-duration bonds.

Credit quality and research: Conservative investors should favour high-rated government or corporate bonds. Those with higher risk appetite can benefit from well-researched strategies that anticipate upgrades or downgrades.

Don’t blindly trust YTM: The yield-to-maturity assumes holding bonds till maturity and reinvesting at the same rate—conditions that rarely hold. It’s not a return guarantee.

Liquidity matters: Whether you invest directly or via mutual funds, understand how easily you can exit. If flexibility is important, favour short-duration or highly liquid instruments.

Review regularly: Just like equities, fixed income investments require monitoring. Keep tabs on rate cycles, credit ratings, and broader liquidity shifts.

Also read: This CEO has no fixed-income investments, and has never done an SIP

Summing up

The world of fixed income has changed. Interest rates, credit risks, liquidity conditions, and market sentiment now have a more visible impact on returns. To navigate this landscape, investors need to let go of outdated assumptions and embrace a more active, informed approach.

As this evolving asset class offers both stability and strategy, it may no longer be entirely “fixed,” but it remains very much relevant.

Also read: Mastering Fixed Income Trinity: Balancing income, duration, and liquidity for smarter investments

Bhupendra Meel, Head – PMS & Alternative – Fixed Income, Bandhan AMC. Views expressed in this column are personal.