(Bloomberg) -- German bonds fell, extending their worst daily drop since 1990, as investors around the world demand more to buy debt following the nation’s historic spending plans.
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The 10-year bund yield rose as much as 14 basis points on Thursday to reach 2.93%, the highest since October 2023. The rate jumped 30 basis points on Wednesday following the announcement of a sweeping fiscal overhaul to unlock hundreds of billions of euros for defense and infrastructure investments.
The rout in German bonds reverberated through global debt markets, with Japan’s government yields reaching their highest levels in more than a decade and yields in Australia and New Zealand also surging. Italian yields jumped above 4% for the first time since July, and UK gilts extended losses for a second day.
“Markets are still trying to find out what the new equilibrium is, and we wouldn’t fight this adjustment for now,” said Evelyne Gomez-Liechti, a strategist at Mizuho International Plc. She expects German 10-year yields to next meet resistance at 3%.
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Focus now turns to the European Central Bank meeting on Thursday, with markets paring wagers on further interest-rate cuts. Swaps are now favoring just two further reductions by year-end for the first time in this easing cycle. On Tuesday, three cuts were fully priced and there was a chance of a fourth.
READ: German Debt Has Worst Day Since Aftermath of Berlin Wall’s Fall
Germany’s dramatic change following years of fiscal conservatism comes in response to the US pullback from its commitment to European security. That has prompted European leaders to move swiftly to mobilize additional defense funds to counter the threat of Russian aggression.
Year-to-date gains on euro-denominated investment-grade corporate bonds were wiped out on Wednesday as well, a Bloomberg index shows. The notes have now lost 0.2% so far in 2025, after suffering their biggest drop Wednesday since June 2022, the data show.
Adding to the mix are scheduled bond sales from France and Spain on Thursday which are mostly skewed toward longer maturities.
“We are now in the middle of a historic shift” in economic and defense policies, said Hideo Shimomura, senior portfolio manager at Fivestar Asset Management Co. in Tokyo. “We can’t be bullish on bonds until we see the direction of that shift.”