Why Indian 30-Year Government Bonds Are a Strategic Buy for Pension Funds and Long-Term Investors in 2025

The Indian bond market in 2025 is at a pivotal inflection point, offering pension funds and long-term investors a rare confluence of favorable yield curve dynamics, regulatory tailwinds, and macroeconomic momentum. For ultra-long-dated instruments like 30-year government bonds, the case for strategic allocation is compelling—and perhaps even urgent.

Yield Curve Positioning: A Steep Gradient of Opportunity

The India 30-year government bond yield has climbed to 7.09% as of mid-July 2025, while the 10-year yield lingers at 6.32%. This 74-basis-point spread is the widest in nearly four years, reflecting a yield curve that is not just upward-sloping but sharply convex. Such a gradient is typically a signal of market expectations for sustained economic growth, inflationary pressures, and a gradual unwinding of accommodative monetary policy.

For pension funds and long-term investors, this steepness is a double-edged sword. On one hand, it offers a premium for locking in capital over ultra-long horizons—critical for liabilities that span decades. On the other, it demands a nuanced understanding of reinvestment risk. The key lies in leveraging the yield curve's convexity. By allocating to 30-year bonds, investors can secure a higher yield than shorter-term alternatives while avoiding the reinvestment risk that plagues cash flows from shorter maturities, which may need to be reinvested at lower rates in a declining interest rate environment.

Bandhan Asset Management, which manages $11.48 billion in assets, has already positioned its dynamic gilt fund to capitalize on this dynamic. The fund's manager, Harshal Joshi, argues that the 30-year bond's spread relative to the 10-year is “unattractive but strategic,” given the current macroeconomic landscape. The firm is also eyeing the six- to eight-year segment, where a “kink” in the yield curve offers an additional layer of yield advantage.

Regulatory Flexibility: A New Era for Pension Fund Allocation

Regulatory shifts in 2025 are further amplifying the appeal of Indian 30-year bonds. The Pension Fund Regulatory and Development Authority (PFRDA) has begun easing restrictions on pension funds, which previously limited their exposure to corporate bonds with maturities under three years. These changes, driven by the need to optimize returns on a rapidly growing pool of household savings (now $168 billion as of March 2025), are unlocking new avenues for pension managers to diversify into longer-dated instruments.

The Association of NPS Intermediaries has pushed for the relaxation of single-credit rating requirements for shorter-term corporate bonds, but the broader trend is toward flexibility. This is particularly relevant for sovereign bonds, where credit risk is minimal and liquidity is improving. With the Reserve Bank of India (RBI) signaling a shift in its bond issuance strategy—prioritizing shorter-term maturities to manage liquidity—there is a growing expectation that the supply of 30-year bonds will normalize, stabilizing yields and reducing volatility.

Macroeconomic Tailwinds: Inflation, Index Inclusion, and Global Appetite

The macroeconomic backdrop for Indian 30-year bonds is robust. The RBI's rate-cutting cycle in 2025—three cuts totaling 100 basis points—has pushed benchmark yields lower, creating a fertile environment for long-term financing. Corporate bond yields, meanwhile, continue to offer a healthy spread over fixed deposits, even for lower-rated instruments. This spread, currently between 20 to 30 basis points, is a critical draw for yield-hungry investors.

Global factors are also aligning. The inclusion of Indian bonds in the JP Morgan GBI-EM index and the anticipated addition to the FTSE EMGBI index by September 2025 is expected to attract $30–40 billion in annual passive inflows. These flows will not only deepen the market for 30-year bonds but also reduce their volatility, making them more attractive to risk-averse pension funds.

Moreover, India's structural shift from a bank-dominated credit model to a market-based one is creating a more efficient capital allocation system. Corporations, now more creditworthy due to deleveraging and improved governance, are increasingly turning to bonds for long-term financing. This trend is expected to continue, with corporate bond issuance hitting a record ₹9.9 trillion in FY25.

Mitigating Risks: A Balanced Approach

While the case for 30-year bonds is strong, investors must remain cognizant of risks. The most immediate is reinvestment risk: if the RBI's liquidity management tools (such as variable rate reverse repos) compress short-term yields, cash flows from intermediate maturities may need to be reinvested at lower rates. To hedge this, pension funds can adopt a ladder strategy, allocating portions of their portfolios to shorter-dated bonds (e.g., 6–8 years) while maintaining a core position in 30-year instruments.

Market volatility is another concern. The yield curve's convexity, while advantageous, can also amplify losses if inflation expectations reverse. However, the current macroeconomic environment—characterized by low inflation, stable growth, and a neutral RBI stance—suggests that such risks are manageable.

Conclusion: A Strategic Buy for the Long Haul

Indian 30-year government bonds are no longer a niche play. They are a cornerstone of a diversified, long-term portfolio, offering a unique combination of yield, regulatory support, and macroeconomic momentum. For pension funds and institutional investors, the current yield curve and regulatory landscape present a window of opportunity to lock in value before the market normalizes.

The time to act is now. As Joshi of Bandhan Asset Management notes, “The market is pricing in a return to equilibrium, but the gap between 10- and 30-year yields is still wide enough to justify a strategic allocation.” With global index inclusion on the horizon and domestic reforms gaining momentum, the 30-year bond is not just a safe bet—it's a strategic imperative.