Inflation and war is an explosive cocktail, the bond market says Inflation and war is an explosive cocktail, the bond market says Inflation and war is an explosive cocktail, the bond market says

Inflation and war is an explosive cocktail, the bond market says

Althea Spinozzi

Senior Fixed Income Strategist

Summary:  The bond market is signaling that the recent invasion of Ukraine will bring higher inflation and slower growth, increasing stagflation probabilities. Meanwhile, the cost to insure Russian bonds has risen to the highest since the 2008 global financial crisis, weighing on emerging markets' cost of funding, particularly in hard currency. Escalation of tensions in Eastern Europe challenges the corporate bond space on both sides of the Atlantic as credit spreads widen to the highest level since the 2020 pandemic.

The Russian invasion of Ukraine is a game-changer for central banks' monetary policies worldwide; that's what the bond market says. Inflation pressure will soar and remain sticker, and central banks will not be able to be as hawkish as initially expected due to a considerable slowdown in growth.

Short-term breakeven rates rose to their highest on record, with the 2-year German breakeven rate rising to 3.5%, the 2-year US breakeven approaching 4% and the 5-year UK breakeven rate hitting 4.8%.

The breakeven rate is the difference between nominal bond yields and the yield of an inflation-protected bond. It tells the market's inflation expectations at a specific time in the future. Interestingly, a fast drop in real yields has led to today's sudden rise in breakeven rates. The bond market tells us that central banks will not be able to fight inflation with an aggressive rate hiking cycle without hindering risk assets' discount margins and growth. The risk of stagflation has risen sharply.

Although nominal yields have dropped across the whole yield curve on the safe-haven demand, their fall has been contained as markets believe that sticky inflation will force central banks to implement tightening policies regardless of growth.

Therefore, the bias for flatter yield curves remains intact, significantly if the situation worsens. As Steen Jakobsen, Chief Investment Officer at Saxo Bank, highlighted in a recent piece: “Western powers will have to hurt themselves if they are to hurt Russia as new sanctions are likely to affect the flow of commodities itself and possibly Russia’s financial system and its access to the world”. Basically, there is a high probability that inflationary pressures might worsen.

Source: Bloomberg and Saxo Bank.

The cost to insure Russian bonds has spiked to the highest since 2008.

Markets are also pricing the risk of a Ukrainian invasion and more sanctions on Russia. The Russian CDS spread has risen to 880bps, the highest since the 2008 global financial crisis. At the same time, eurodollar Russian bonds with 2027 maturity dropped to 60 cents on the dollar. To suffer the most, however, is Ukraine's 2033 eurodollar bonds dropping in distress territory at 38 cents on the dollar.

Although it's quite natural to see the above happening, it's important to keep in mind that these developments increase emerging markets' cost of funding, causing problems within this space.

Source: Bloomberg.

USD and EUR credit risk soar, putting even more pressure on primary corporate bond issuance.

A problem that many are overlooking is that the current situation is adding pressure on an already difficult credit market. Junk bonds haven’t priced in the primary US bond market since February the 10th. After a two-week lull, Twitter was the first corporate to sell $1 billion junk bonds. Yet it cannot be taken as a bellwether, as Twitter is a well-known name in the junk bond space. Today's issuance of BellRing Brands will be more noteworthy, as it will show whether appetite for junk remains sustained despite widening credit spreads and volatility.

The same can be said about Europe despite a junk bond sale deal priced last week. Choppy primary bond markets are a huge red flag for the corporate bond space and central banks, which aim to maintain the smooth functioning of markets.

We believe that the evolving macroeconomic backdrop will deteriorate demand for junk bonds. A tantrum is almost inevitable as stagflation risks become more evident.

Source: Bloomberg and Saxo Group.

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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 (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.