Investors say that the recent increase in Germany’s financing costs is not a rejection of Friedrich Merz’s fiscal plan, but rather a belief that it can boost growth without straining Berlin’s finances.
This week saw a significant rise in German Bunds yields as markets reacted to Merz’s spending plan on defense and infrastructure, leading to a surge in debt issuance. Despite some stabilization towards the end of the week, the 10-year Bund remained elevated above 2.8%, starting the week below 2.5%.
Many experts have revised their growth forecasts upwards, with expectations of a positive impact on German growth. This shift in policy has also driven German stocks to record highs.
Traders adjusting their expectations for ECB rate cuts and anticipation of increased Bund issuance have contributed to the rise in yields. This, coupled with Germany’s light debt burden, has led to a positive outlook for the country’s economy.
Although concerns exist about the impact on other Eurozone countries with higher leverage, the spread between German yields and those of other borrowers has remained stable.
UK bonds were affected by the sell-off, putting pressure on Chancellor Rachel Reeves to address fiscal rules. The future direction of Bunds will depend on the realization of expected German economic growth.
While some analysts caution that deeper issues may persist despite fiscal spending, others are more optimistic about the potential benefits of the fiscal plan.
Bank of America referred to the fiscal stimulus as a “game changer” for German growth, predicting a “meaningfully higher” forecast for the 10-year Bund yield due to the combination of the stimulus and increased bond issuance.
“Bund yields are not rising due to fear, as Germany has ample fiscal space,” stated Mahmood Pradhan, global macro head at Amundi. “The markets view this as a positive outcome for growth.”