A significant shift in German fiscal policy is reshaping global bond markets, leading to an increase in top-rated safe-haven debt and potentially higher government bond yields in Germany.
The parties vying to form Germany’s next government propose a 500 billion euro ($543 billion) infrastructure fund and plan to revamp borrowing rules. This move triggered the largest weekly selloff in Germany's bond market since the 1990s, pushing 10-year bond yields up by over 40 basis points to around 2.9%. Investors are anticipating increased bond sales to finance the uptick in spending.
Despite possible hurdles in passing reforms, many believe this shift will have a lasting impact, positioning German government bonds as the euro area benchmark.
Forecast suggest that German 10-year Bund yields could potentially reach 3%, exceeding current levels by more than 20 basis points. This fiscal policy adjustment may enhance Germany’s economic growth and borrowing potential.
The proposed plans are estimated to boost potential GDP growth in Germany by 1.5% and by 0.8% in the euro zone by 2030. Additionally, it is projected that the measures could lead to over 1 trillion euros of added debt in the next decade, consequently increasing the supply of highly sought-after top-rated bonds.
S&P Global Ratings highlights that Germany’s AAA rating is supported by its strong fiscal flexibility. The changes in Germany’s bond market dynamics are reverberating across Europe and globally, influencing bond yields in France, Italy, the U.S., the UK, and Japan.
The adjustment in German policy could lead to shifts in capital flows and competition among bonds. Investors need to carefully consider how this transformation might impact global bond markets and adjust their investment strategies accordingly.