Global bonds sell-off continues descent
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The news: A global bond sell-off continued on Thursday, as financial markets navigated a dramatic readjustment prompted by Germany’s plans to deploy hundreds of billions of euros in defence and infrastructure spending.
The numbers: The yield on the 10-year Bund climbed an additional 7 basis points to 2.85% by late morning on Thursday, following the steepest rise in almost 30 years on Wednesday. Yields on French and Italian debt also jumped.
Japan’s 10-year borrowing costs hit a 16-year high on Thursday and the US 10-year Treasury note yield rose for a third day, as the German bond sell-off and the size of the proposed fiscal expansion shocked sovereign debt markets that are more familiar with spending restraint from the country.
The context: Germany’s spending announcement follows a dramatic pullback from the US that has seen an unparalleled realignment with Russia and funding cut-off for Ukraine.
On Wednesday, incoming German Chancellor Friedrich Merz agreed a deal with his likely coalition partner to exempt defence spending above 1% of GDP from its debt brake that cap government borrowing, allowing it to pour hundreds of billions in extra funding into its military and infrastructure, and provide assistance to Ukraine. Germany’s unprecedented fiscal spending plans require a constitutional change, which will need to be approved by a two-thirds supermajority in parliament.
The European Central Bank is widely expected to announce a rate cut after its monetary policy meeting later on Thursday, and ECB President Christine Lagarde is likely to be questioned about the central bank’s response to the European-wide defence spending increases.
The pound extended a slide against the euro on Thursday, falling to its weakest level since January, as the euro benefited on the news from Germany which is viewed as likely to benefit German GDP growth, which has been lacklustre over the last couple of years.
Sterling was last at £0.8385 per euro, down about 0.2% on the day. The pound has fallen around 1.5% this week, and is on track for its biggest one-week fall since January 2023.
The sources: Reuters, Financial Times
