German bond sell-off continues on bold fiscal plan
Sharp increase in bond supply expected after German politicians put forward huge spending package
06 March 2025 - 15:23
byStefano Rebaudo
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Benchmark German government bond yields rose again on Thursday after recording their biggest daily jump in more than 25 years the day before, as Berlin’s plans for a huge spending package led investors to expect a sharp increase in German bond supply.
Germany is in for a massive ramp-up in spending, with a €500bn special fund sought for infrastructure, along with plans to unshackle defence investment from restrictive borrowing rules.
“Given inevitable lags in fiscal policy, additional spending could only start to filter through to the economy later this year and into 2026,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “But despite these caveats, the bold fiscal plan has the potential to boost growth and support eurozone assets,” he added, mentioning a possible lift to confidence and an improving backdrop for equities.
Yields on 10-year bonds were up 7 basis points (bps) at 2.86%, after hitting 2.929%, their highest since October 2023. They jumped more than 30bps on Wednesday, recording the biggest daily rise since May 1997.
Markets are confident the European Central Bank (ECB) will cut its key interest rate by 25bps to 2.5% at its meeting later on Thursday but have scaled back bets on future cuts as they expect higher government spending to boost growth and inflation.
Markets are pricing in a 50% chance of another cut in April and a depo rate of 2.05% in December, from 1.92% late on Tuesday.
A key market gauge of long-term eurozone inflation hit 2.2856%, its highest since July 2024.
“We are less sure it [changing the German fiscal regime] will prevent the ECB from cutting to 2% and below this year,” said Jamie Searle, European rates strategist at Citi.
He cited several factors supporting this view, including US tariffs on Europe likely coming on April 2, negative growth developments, the disinflationary effect of falling oil prices and the expected delay in fiscal spending implementation.
Germany’s two-year yield, which is more sensitive to ECB policy rates, dropped 1bps after earlier rising to 2.319%, its highest since mid-January. It rose 22.5bps on Wednesday in its biggest daily jump since March 2023.
Other euro area bond yields followed Bunds, leaving spreads roughly unchanged.
Analysts argued that joint EU borrowing for new investments would be crucial to support government bond prices of highly indebted countries such as Italy and France.
The yield spread between French and German bonds was steady at 70bps, at the lower end of its recent range. The yield gap between Italian and German bonds — a market gauge of the risk premium investors ask to hold Italian debt — widened 2.5bps to 106bps, after dropping below 100bps for the first time since 2021 the day before.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
German bond sell-off continues on bold fiscal plan
Sharp increase in bond supply expected after German politicians put forward huge spending package
Benchmark German government bond yields rose again on Thursday after recording their biggest daily jump in more than 25 years the day before, as Berlin’s plans for a huge spending package led investors to expect a sharp increase in German bond supply.
Germany is in for a massive ramp-up in spending, with a €500bn special fund sought for infrastructure, along with plans to unshackle defence investment from restrictive borrowing rules.
“Given inevitable lags in fiscal policy, additional spending could only start to filter through to the economy later this year and into 2026,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “But despite these caveats, the bold fiscal plan has the potential to boost growth and support eurozone assets,” he added, mentioning a possible lift to confidence and an improving backdrop for equities.
Yields on 10-year bonds were up 7 basis points (bps) at 2.86%, after hitting 2.929%, their highest since October 2023. They jumped more than 30bps on Wednesday, recording the biggest daily rise since May 1997.
Markets are confident the European Central Bank (ECB) will cut its key interest rate by 25bps to 2.5% at its meeting later on Thursday but have scaled back bets on future cuts as they expect higher government spending to boost growth and inflation.
Markets are pricing in a 50% chance of another cut in April and a depo rate of 2.05% in December, from 1.92% late on Tuesday.
A key market gauge of long-term eurozone inflation hit 2.2856%, its highest since July 2024.
“We are less sure it [changing the German fiscal regime] will prevent the ECB from cutting to 2% and below this year,” said Jamie Searle, European rates strategist at Citi.
He cited several factors supporting this view, including US tariffs on Europe likely coming on April 2, negative growth developments, the disinflationary effect of falling oil prices and the expected delay in fiscal spending implementation.
Germany’s two-year yield, which is more sensitive to ECB policy rates, dropped 1bps after earlier rising to 2.319%, its highest since mid-January. It rose 22.5bps on Wednesday in its biggest daily jump since March 2023.
Other euro area bond yields followed Bunds, leaving spreads roughly unchanged.
Analysts argued that joint EU borrowing for new investments would be crucial to support government bond prices of highly indebted countries such as Italy and France.
The yield spread between French and German bonds was steady at 70bps, at the lower end of its recent range. The yield gap between Italian and German bonds — a market gauge of the risk premium investors ask to hold Italian debt — widened 2.5bps to 106bps, after dropping below 100bps for the first time since 2021 the day before.
Reuters
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