The dramatic increase in German funding costs this week is far from Friedrich Merz’s rejection of the fiscal bazooka, investors say many believe they can drive growth without growing Berlin’s finances beyond sustainable levels.
The German exterior has made the largest day sales as the market adapted to dramatic changes in German fiscal policy, adapted to a massive increase in debt issuance, and adapted to plans to spend on defense and infrastructure following Mertz’s “need anything” plan.
Despite settling at the end of the week, the 10th band rose above 2.8% on Friday, starting the week below 2.5%.
“The German authorities have finally awakened to the fact that they need to take dramatic action to revive the economy and strengthened their defense,” said Nicolas Trindade, senior portfolio manager of Axa’s investment division. “This is positive for medium-term growth and Germany definitely has enough financial space to accommodate this very large extra spending.”
As early as Thursday morning, economists began revising their growth forecasts. BNP currently forecasts Germany’s GDP to increase by 0.7% this year and 0.8% in 2026. The uptick in anticipation also helped lead German stocks to record highs on Thursday.
Gordon Shannon, fund manager at TwentyFour Asset Management, said Bund’s yields and rising stock prices were “supporting the positive impact of this policy shift on Germany’s growth.”
Even before Thursday’s meeting reduced the eurozone benchmark rate to a quarter point to 2.5 percent, yields rose as traders moved to cut expectations of the European Central Bank’s rate cut. According to the swap market level, traders are currently fully priced with just one more quarter point reduction.
Another major factor in the yield jump is assets that set a benchmark for eurozone debt prices, but are often scarce assets that are in the way of limiting borrowing from German “debt brake” governments, according to investors.
This shortage is also one of the reasons why it has been traded below zero over the last decade for a long period of time, as central banks hold a large portion of the available inventory.
Traders began betting seriously on higher band issuances last year, as speculation rose more than debt brake reforms.
Felix Feather, an economist at Asset Manager Aberdeen, said higher yields reflect the risk that the broader eurozone debt market could make supply of issuances “when new fiscal headroom is in practice.”
He was not driven by perceived increased credit risk, he said. “The possibility that Germany will default or restructure its obligations is not a concern for us at this point,” he said.
Investors said this was miles away, according to the UK experience in 2022 when Liz Truss’s unfortunate “mini” budget caused a gold leaf crisis. A similar extreme scenario in Germany would affect the entire Euro area.
“Germany is the backbone of the eurozone. If Germany’s budget goes out of control, the euro will toast,” said Berto Frossbach, co-founder and chief investment officer of German asset manager Frossbach von Stouch.
The country’s light debt burden means that the debt is equivalent to about 63% of GDP and is closer to more than 100% of several other large economies, but such a scenario is considered highly unlikely.
There is more concern among investors about the potential impact of a shift in borrowing costs in other euro regions, which are already much more leveraged.
The spread between German yields and other eurozone borrowers such as France and Italy remained stable this week. This contrasts with historical stress moments such as the eurozone debt crisis. However, rising Lockstep yields with Germany still puts pressure on countries with heavy debt burdens.
The UK bonds were caught up in the sale, with yields over 4.6% on Friday coming just a decade-long statement, below 4.4% as the government comes just weeks before it issued a statement on March 26th.
Mark Dowding, chief investment officer for bonds at RBC Bluebay Asset Management, said the rise in yields pressured Prime Minister Rachel Reeves to “take cuts to reduce taxes or cut spending.”
A key factor in where the birth begins here is whether Germany’s economic growth is expected.
In one of the most optimistic outlooks, the German economic think tank IMK predicted that the German economy beyond the medium term could return to growth rates of up to 2%.
Analysts also warn that breeding debt-funded investments is not enough to overcome Germany’s sustained growth crisis.
The export-dependent manufacturing sector has also been hit hard by geopolitical tensions. “A wider deficit alone won’t solve the problem. [those challenges]Oliver Lacau, chief German economist at Oxford Economics, said:
However, other analysts are more positive. Bank of America called the fiscal stimulus a “game changer” for Germany’s growth. This, combined with the issuance of higher bonds, pointed to a “meaningly higher” forecast of 10-year residues than previously expected.
Mahmoud Pradhan, Amundi’s global macro director, argued that “the breast yield has not risen out of fear, as Germany has a lot of financial space.” “The market is treating this as a positive outcome of growth.”
