Stagflation builds the case for short-term real and nominal sovereigns Stagflation builds the case for short-term real and nominal sovereigns Stagflation builds the case for short-term real and nominal sovereigns

Stagflation builds the case for short-term real and nominal sovereigns

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  European and UK PMIs and stubborn inflation expectations paint the perfect stagflation picture for the old continent. While the BOE might need to tighten further, the ECB is unlikely to hike rates again. As the hiking cycle ends, short-end government bonds provide enticing returns. However, short-term inflation linkers remain in the spotlight as inflationary pressures might resurface in the last quarter of the year.

Germany and the Netherlands are in a recession, and PMI numbers paint an ugly picture for Europe. Yet, inflation expectations have slowly risen, showing that the ECB 2% target might not be plausible.

Within this context, the ECB will have its hands tied as it won't be able to cut or hike rates, not to spur inflationary pressures, nor to drive the euro economy into a recession.

That means that front-term yields will be anchored for some time, while long-term yields might adjust lower as a recessionary picture develops.

Although things might be different for the BOE as another rate hike might be necessary, it is impossible not to acknowledge the attractiveness of short-term government bonds within this context.

As uncertainty remains elevated, we favor short-term European government bonds, especially inflation linkers, as inflationary pressures might resurface during the last quarter of the year.

  • The 2-year German swap remains elevated.

It indicates that market expectations are still anchored around a higher for longer rate scenario, providing little room for government bonds to rally. That explains the bull flattening of the European yield curve after the ugly PMI reading, with 2-year Schatz yields remaining around 3%. Indeed, while bond future markets have pushed back on bets of another ECB interest rate hike, they are still pricing a 10bps hike by September and 15bps by October.

Source: Bloomberg.
  • Europe’s inflation expectations have increased since last month

The problem the ECB is facing is that amid an economy in contraction, inflation expectations have increased within the last month. That builds a floor for front-term yields, while long-term yields are able to fall amid recessionary fears.

Source: Bloomberg and Saxo Group.

Short-term European sovereign bonds

Source: Bloomberg and Saxo Group.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank (Schweiz) AG
The Circle 38

Contact Saxo

Select region


All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.