Investors are sticking with short-dated bonds in Europe and the UK, betting that expectations for interest rate increases have gone too far. Allspring Global Investments, CG Asset Management and RBC Blue Bay Asset Management are positioned for the gap between short- and long-term yields to widen again after narrowing in recent weeks. A global bond selloff deepened this week as a jump in energy prices fanned inflation concerns, prompting traders to boost bets on aggressive tightening from the Bank of England and the European Central Bank.

Yield curves have flattened in response. "Pricing on interest rates looks too hawkish," said Lauren Van Biljon, senior portfolio manager at Allspring. She is holding on to an overweight position in two to five-year UK and European government bonds. "The very long-end of curves in both US and Europe remain a tough buy, but there are opportunities in short and intermediate bonds that are interesting." Swaps are currently pricing four more quarter-point rate hikes from the ECB by the end of next year, the most hawkish scenario since the central bank lifted rates for a second time earlier this month. For the BOE, markets fully price four hikes and a high chance of a fifth.

CG Asset Management’s Emma Moriarty is also skeptical about the speed and scale of BOE’s rate increases priced by markets. The firm has bought one to five-year gilts, arguing the implied rate path isn’t credible given the UK’s weak economic growth outlook. RBC Blue Bay is expressing a similar view through a UK steepener trade, which profits if the gap between longer- and shorter-dated yields widens.

Mike Bell, the firm’s head of market strategy, said market pricing of four BOE hikes is too aggressive. "We’re monitoring oil prices carefully in case we need to change our minds," Bell added. "But we think that the Bank of England is unlikely to hike as much as is priced in." Fidelity International’s Mike Riddell, lead manager of the firm’s Strategic Bond Fund, has cut long-dated debt in the UK and Italy, among other regions. "We still believe markets are pricing too many hikes across several developed economies, however we now prefer to express this view toward the front end of the curve, through yield-curve steepeners," he wrote in a note dated Tuesday. The steepener trades have been painful for investors globally in recent weeks. The gap between five and 30-year bonds in Germany and the UK shrank to its narrowest since early 2025.

The trend extends to the US, where the equivalent spread is on track for a sixth straight week of declines, even as 30-year Treasury yields reached their highest level since 2004 Thursday. US 30-Year Yield Hits Highest Since 2004 as Bond Selloff Deepens The recent losses from steepening trades are making some investors reluctant to bet on an imminent reversal. Continued uncertainty around the direction of oil prices is adding to that caution. "Many people have been caught on the wrong side of the trade and so there will be I think a reluctance to re-enter too soon," said Camille de Courcel, head of developed market rates strategy at BNP Paribas SA.

With energy prices near the ECB’s severe scenario, a terminal rate of 3.5% cannot be ruled out, she added. There are fundamental reasons to expect curves to steepen eventually. Heavy government borrowing and large deficits could keep long-term yields elevated, while a resolution to the Iran war could reduce expectations for further rate hikes, lowering short-dated yields.

Michiel Tukker, a rates strategist at ING, also thinks steepeners are ultimately the right trade. Still, he is waiting for oil prices to become less volatile before going back in."This is something the entire market struggles with," he said.