Bond navigators: Stagflation déjà vu? Why 2026 is not a 2022 re-run

March brought back a word markets would rather forget: stagflation. Expectations of sticky inflation alongside softening growth saw government bond markets reach instinctively for the 2022 playbook. But familiarity can be misleading. This is a different cycle, with very different risks, and treating it as a rerun of the last inflation spike could prove costly.

In 2022, stagflation was driven by an inflation shock at a time when demand could cope. Prices were accelerating rapidly, with central banks firmly behind the curve. Markets were forced to reprice how high rates needed to go and how quickly. Policy credibility was tested, sparking a violent repricing in shorter maturity bonds, wider inflation break-evens, and a sharp rise in real yields. Crucially, this was happening against a backdrop of resilient demand, excess savings, and corporate balance sheets still benefiting from ultra‑cheap pandemic‑era financing.

Even with sticky headline data, the more important story is the growing squeeze on households and businesses.

Today’s challenge looks superficially similar, but the macro dynamic is very different. Inflation is no longer surprising markets; it is persisting. Prices are still rising, but they are no longer accelerating. Even with sticky headline data, the more important story is the growing squeeze on households and businesses. This is inflation coexisting with weakening demand, not inflation overpowering it. A squeeze of this scale is ultimately disinflationary over time. Even if core inflation were to re‑accelerate, the transmission would be far more likely to undermine demand than to sustain growth.

Not a repeat of 2022

This is not a repeat of 2022, when inflation surged even as growth held up, and this distinction matters for policy. The question has shifted from how high rates need to go to how long they can remain restrictive without breaking demand. Markets are implicitly assuming that corporate and household balance sheets can absorb restrictive policy for much longer. That assumption looks increasingly stretched. Real household incomes are under pressure, while corporates face higher refinancing costs into a weakening demand environment. In the UK, mortgage rates above 5% are already biting, energy bills are set to rise again later this year, and food inflation remains vulnerable to renewed pressure from oil and fertiliser costs. Initial estimates suggest a 5–7% hit to disposable income could translate into a 1–2% drag on GDP. That is not an economy muddling through; if sustained, it points toward recession.

Risk of weaker growth

Yet front‑end‑led price action across global bond markets implies cuts are delayed or denied altogether. That is difficult to reconcile with the growth arithmetic. Inflation does not need to be completely fixed to start easing, policymakers just need demand to weaken enough that staying restrictive would be the bigger mistake. Markets remain anchored to the trauma of 2022, when inflation forced central banks to chase, and credibility was on the line. In our view, the risk today is the opposite: underestimating how quickly a prolonged squeeze on incomes feeds through into weaker growth.

This asymmetry underpins our continued long duration preference. We are comfortable with long duration not because inflation risk has disappeared, but because we think that the next macro surprise is more likely to come from a downside growth shock, which markets continue to misprice. The upside scenario assumes economies can absorb restrictive policy well into 2027 without a meaningful slowdown. That outcome is possible, but far from assured. The downside is cleaner: weaker demand would prompt a faster repricing of cuts and sharper moves in rates.

Stagflation is an easy label to reach for when the data feels awkward, but sometimes labels obscure more than they explain. 2022 was an inflation shock with demand resilience. 2026 looks like a supply‑driven inflation problem colliding with fragile demand. Sticky inflation does not stop demand from breaking down. But when costs stay high for long enough, spending eventually gives way. In our view, the asymmetry still favours duration, and that is why we remain long.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.