Inflation, Inflation, Inflation
Weekly 16.05.2026
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Research Pieces:
Bond Rout Driven by Surging Inflation.
LB-MACRO Scenarios Update: Energy, Inflation and Rates Moving Higher.
1. Bond Rout Driven by Surging Inflation
1.1 Overview
Our long-standing view on the ongoing supply shock is that the surge of inflation would "win" over demand destruction, thus sinking bonds. Consistently, yield curves have shifted higher across the EMU, UK, US and Japan, with spreads on "high beta" bonds, like BTPs and Gilts widening.
In general, this upward movement has been driven by:
Higher inflation expectations, especially over the next two years.
Short-term yields - i.e. the curves have flattened - on the back of expectations of tighter monetary policy.
Larger premia for BTPs and Gilts plagued by high government debt and political risks.
Looking forward, we expect the sell-off in bonds to continue, as markets are forced to price both higher inflation and policy rates. These are the indications stemming from the risk analysis embodied in our macroeconomic scenarios (see section 2).
As well as those stemming from data, signalling that the pass-through of the supply-shock onto inflation is happening, full-steam. Indeed:
The "direct" effects of higher oil and gas prices on CPI energy prices are already very visible.
The "indirect" effects on upstream, Producer and Wholesale prices are becoming evident, confirming the indications from the PMIs.
The last shoe to drop will be "second-round effects through higher wages, which will take several months to materialize, but it will.
The surge in inflation expectations over the next two years is highly indicative that this will indeed happen.
1.2 Yield and Inflation Curves Moving Up in Sync
Since the onset of the supply shock, nominal G4 government bond yield curves have shifted meaningfully upwards (black lines in Figs. 1-4). This is largely motivated by the surge in inflation swaps, especially, though not exclusively, over the near-term (grey lines in Figs. 1-4).
Despite some flattening (see section 1.3), yield curves remain well upward sloping, suggesting markets aren't factoring in significant demand destruction. Indeed, this is the message also from inflation swaps (encompassing expectations and premia), which are pricing a durable inflation shock.
In particular, data show that:
