Investors bet on german bonds

In the bond market, there is a strategy known as curve steepener that is gaining significant momentum, and this is due to the recent collapse of German bonds, the worst in the last twenty years, which has stimulated the sale of long-term debt. The curve steepener is essentially a bet based on the idea that long-dated securities will tend to underperform short-term ones.

This is exactly what happened in the first week of March. In fact, the yield gap between 2-year and 10-year German bonds increased significantly in the last two years, and even more notably since Germany announced plans to invest hundreds of billions of euros in defense and infrastructures. The yields on benchmark 10-year bunds increased by 43 basis points, reaching 2.84%, surpassing the 22 basis-point rise in shorter-term debt.

Meanwhile investors such as Goldman Sachs Asset Management, State Street Global Advisors, and Nuveen, are betting that European yield curves will continue to steepen. The market is expected to demand higher returns to buy long-term debt because the increase in public spending will lead to three consequences: a rise in bond issuance, higher growth, and a potential increase in inflation.