Bond navigators: Enter the BIFs

Move over PIIGS, and enter the BIFs, or Britain, Italy and France – as it seems a term coined on our Rates desk is now gaining wider traction. The BIFs reflect a shift in focus from legacy concerns in more indebted, often smaller, economies, to growing fiscal pressures in Europe’s largest issuers.

These jurisdictions are facing a mix of challenges including high debt to GDP, large deficits, political instability and heavy issuance – all at a time when inflation pressures remain high, and bond investors are feeling nervous. This backdrop is difficult. Geopolitical risks are rising, spending demands on defence and energy are increasing amid already stretched public finances. Unlike the post‑global financial crisis PIIGS episode (PIIGS denoting Portugal, Ireland, Italy, Greece and Spain), the BIFs scenario is less about solvency and more about supply as investors demand greater compensation (in the form of higher yields in longer dated debt, known as term premia) with rising borrowing needs. Domestic political factors also add to the fiscal challenges, with the risk of higher spending, which is reflected in higher borrowing costs.

Since the outbreak of war in late February, that shift in sentiment has been clearly reflected in bond markets (Chart 1). Across Europe, 10‑year yields have risen materially, with the average BIF spread to German bunds widening. Gilts have been particularly notable with 10‑year spread over bunds widening by over 40bps, while 30‑year gilt yields have returned to levels last seen in the late 1990s. Curve moves tell a more nuanced story, as shown in Chart 2. The 5s30s curve flattened sharply into mid‑March as front‑end yields led the sell‑off, before partially re‑steepening into April as long‑end term premia and supply concerns came into focus. Despite that late rebound, curves ended flatter overall over the period. Gilts have underperformed peers, reflecting risks of stickier inflation, higher rate expectations, and greater sensitivity to supply. It is worth noting that gilts have tracked Italy closely in beta terms, though with more pronounced volatility along the curve, illustrating that the UK government bond market has moved to become one of, if not the, most reactive markets in Europe.

Chart 1: Change 10yr spread over bunds since war began (bps)

Source: Bloomberg as of 12/05/2026

Chart 2: Change in 5s30s curve (bps)

Source: Bloomberg as of 12/05/2026

The key question is whether this repricing has opened up value. Yields have moved a long way and reflect a meaningful risk premium, but we don’t see this as a ‘default risk’ story. It is more about how much governments need to borrow, and how comfortable investors feel about it, rather than any risk of them not repaying their debt. Across our Rates desk strategies, we have increased duration exposure into these moves and have taken profits on UK yield curve flatteners. We have added to exposure in the five to seven-year part of the curve, where we feel value looks more compelling and carry is attractive, without the price volatility of longer dated bonds. Some of these shifts can be justified by the higher inflationary backdrop, but the markets reflect a relatively hawkish interest rate outlook, with close to three interest rate hikes priced into the UK and Europe over the next 12 months – despite a backdrop where downside pressure on growth continues to build.

The BIF story is unlikely to fade quickly, with the potential for meaningful political concerns across all three economies building on top of entrenched debt level fears. It is likely that markets will continue to demand monetary and fiscal discipline from policymakers to keep the politicians in check. For now, we think that gilts and wider fixed income assets look much closer to good value than to vulnerability. But one thing is certain – until the inflationary genie is back in the bottle, volatility is here to stay. 

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