The yield on Germany's 10-year bond initially rose by as much as 3 basis points but soon pared some of those gains to hover around 2.48% on Monday, as traders processed the election results in Germany.
Germany 10-year yield trims some gains
The conservative CDU/CSU bloc secured 28.6% of the vote, followed by the far-right Alternative for Germany (AfD) with 20.8% and the center-left SPD at 16.4%, aligning closely with pre-election expectations. CDU leader Friedrich Merz will need at least one coalition partner to form a parliamentary majority, and a potential deal with the SPD is considered the most likely outcome. However, coalition negotiations could be drawn out as both parties will have to navigate key policy differences, potentially delaying the formation of a stable government.
AfD and the Left Party together secured about a third of the seats in Parliament
Meanwhile, the far-right AfD and the Left Party together secured about a third of the seats in parliament, which gives them significant leverage to block critical legislation, complicating efforts to pass essential laws. This fragmented political landscape could make the introduction of pro-growth policies more difficult, particularly if the CDU and SPD struggle to reach consensus. Additionally, reforming the debt brake, which limits government borrowing, to allow for higher public spending is expected to be a contentious issue in the upcoming negotiations. With mounting challenges ahead, the new government will face pressure to address key economic issues, such as investment in infrastructure and social programs, while navigating a political environment that could hinder swift action. Investors will be watching closely for any signs of political instability or delays in policy implementation, as these could impact both Germany's economic outlook and the broader European market sentiment.
