(Bloomberg) — German bonds fell ahead of a key parliamentary vote that’s expected to open the door for Europe’s largest economy to spend hundreds of billions of euros in defense and infrastructure.
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The yield on German 10-year bonds rose two basis points to 2.84%, paring yesterday’s drop. The rate peaked at 2.94% last week before trimming the move as analysts said the selloff was overdone. The DAX Index outperformed European peers, rising 0.8%, while the euro climbed 0.3% to $1.0955, a fresh five-month high.
Investors are confident chancellor-elect Friedrich Merz will get the two-thirds majority required to seal the spending increase, after he won political backing from a rival party last week. The decision to unleash the power of the federal balance sheet to transform the military and revamp the country’s infrastructure calls time on an era of budget restraint that’s hobbled the economy for years.
It’s a “historic event, that also by definition means that they can’t be as strict as before on European partners,” said Michael Krautzberger, global chief investment officer for fixed income at Allianz Global Investors. He said he’s “optimistic” ahead of the vote.
Going into the ballot, bond giants Pacific Investment Management Co. and BlackRock Inc. are holding underweight positions on euro-area bonds. BlackRock cited the outlook for greater debt sales in the region, while predicting the scope for more interest-rate cuts would be limited as the wave of new spending threatens to reignite inflation.
While yields remain elevated, other bond investors are more comfortable with the idea of increased issuance and point to the fact that debt sales are only likely to rise significantly from next year.
“Given the relatively long-term nature of the proposed spending and the fact that the improved growth picture may not materialize until at least next year, we believe that 10-year bunds around the 3% level offer value over the next six months,” said Daniel Loughney, head of fixed income at Mediolanum.
This means yields can’t go much higher for now, according to many analysts. Morgan Stanley’s chief fixed income strategist Vishwanath Tirupattur said the risks of oversupply are “contained” until next year, while UBS Group AG’s Reinout De Bock said a 3% yield will be the ceiling for the 10-year note.
