The yield on Germany’s 10-year Bund rose back toward 2.9%, nearing its highest level since mid-October 2023, as bond markets reacted to fiscal policy uncertainty and shifting monetary expectations.
Germany's Bund yield climbs back toward 2.9%
The move followed the Bund’s largest weekly increase since February 1990, reflecting heightened volatility in European debt markets as traders weighed the implications of looser fiscal policy against the European Central Bank’s more cautious approach to monetary easing.
Investors closely monitored ongoing political negotiations in Germany regarding a significant increase in fiscal spending. The Green Party vowed to block the CDU/CSU and SPD's plans to expand state borrowing for military and infrastructure projects, raising concerns about the potential delay or downsizing of the proposed stimulus. However, the Greens presented alternative proposals on Monday in an effort to reach a compromise, signaling that discussions remain fluid. Markets are particularly focused on whether the final spending package will be large enough to stimulate growth while also adhering to Germany’s constitutional debt brake, a point of contention among policymakers.
Investors adjusted their expectations for future ECB rate cuts
On the monetary policy front, investors adjusted their expectations for future ECB rate cuts after the central bank implemented a widely expected 25bps reduction in March but struck a more hawkish tone in its accompanying statement. ECB policymakers signaled that further rate cuts may be on hold for now, as inflation remains above target and wage growth continues to exert upward pressure on prices. This shift led traders to scale back bets on aggressive easing in the coming months, with money markets now pricing in fewer rate cuts for 2025 than previously expected.
German economic data painted a mixed picture
Meanwhile, German economic data painted a mixed picture, with recent industrial production figures showing a slight rebound but business confidence surveys remaining subdued. The combination of fiscal uncertainty, shifting rate expectations, and economic fragility has kept bond markets on edge, with traders looking ahead to key inflation data and upcoming ECB meetings for further clarity on policy direction.
