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(Bloomberg) -- Germany’s benchmark bond yields are within touching distance of hitting 3% for the first time in almost 18 months on expectations of a historic surge in borrowing.
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The 10-year rate briefly surpassed a peak hit last week, climbing four basis points on Wednesday to 2.93%, the highest since October 2023. That takes the increase this month to 53 basis points, the most in two years.
German debt has plunged in the wake of Berlin’s plan to unlock hundreds of billions of euros for defense and infrastructure investment. The package, spearheaded by the country’s prospective chancellor Friedrich Merz, is being discussed with other parties and markets are confident a deal can be reached.
“I’d look for bund yields of 3% this year,” said Alex Everett, a fund manager at aberdeen group plc, who said opposition from the Green’s party to the package is “sabre-rattling” and unlikely to derail it.
The potential sea change in Germany’s fiscal policy has led investors to demand higher returns to hold long-term debt compared to short-term securities, which tend to be more affected by monetary policy expectations. The gap between German two- and 10-year yields has risen to around 70 basis points, the highest since July 2022. One year ago, the spread was inverted by half a point.
“The anticipated fiscal spending is huge,” said Brian Mangwiro, a portfolio manager at Barings. Investors “have to ask for a better clearing price for bonds.”
If yields were to hit 3.03%, that would the highest since 2011, in the aftermath of the euro area’s financial crisis. These levels are a turnaround from the years before the pandemic, when yields dipped below zero — making it effectively free for Germany to borrow money. Now its plans to take on more debt could come at an increasing cost.
Looking Attractive
Yet for some in the market, the repricing has already overshot. In a note published Wednesday, HSBC Holdings Plc rates strategist Chris Attfield said he’d turned bullish on euro-area core bonds, with German yields looking attractive above 2.60%.
Still, the bank revised its year-end target higher by 30 basis points, to 2.20%, in recognition that the fiscal changes underway may imply a higher neutral rate for the bloc’s economy. That would limit the extent to which bonds can rally.