Worst German bond rout since 1990 triggers global selloff as yields surge

German bonds extended their rout, with debt markets around the world sliding in the wake of Berlin’s historic plan to unlock hundreds of billions of euros for defense and infrastructure. 

Yields on 10-year bunds continued their march higher, adding as much as 14 basis points on Thursday to reach 2.93 per cent, the highest since October 2023. The rate jumped 30 basis points on Wednesday — the biggest increase since the months after the Berlin Wall fell in November 1989.  

The selloff in German bonds reverberated through global debt markets, with Japan’s government yields reaching their highest levels in more than a decade and yields in Australia and New Zealand also surging. Italian yields jumped above 4 per cent for the first time since July. Yields on US Treasuries were however mixed as of 9:17 a.m. in New York, with short-end notes rallying, and UK gilts erased losses as the day progressed. 

 

German bonds held their declines after the European Central Bank cut rates as predicted and indicated its easing phase is drawing to a close. Traders had been on the lookout for signs officials could slow the pace of reductions, given the risk a wave of defense spending in the region could reignite inflation.  

“Today is a stark reminder that bond yield levels are determined globally,” said Martin van Vliet, global macro fixed income strategist at Robeco. “The bond market in the end is a global market, because investors like us look at cross-market yield spreads — and invest on them.” 

An emergency EU leaders’ summit on the war in Ukraine was also in focus for more details on the broader ramp-up in defense budgets since the US pulled back from its commitment to European security. 

The euro extended gains to hit the day’s high as ECB policymakers signaled rates are becoming meaningfully less restrictive. The yield on 10-year German notes was up eight basis points as ECB President Christine Lagarde spoke following the decision, trading at 2.88 per cent. Traders trimmed bets on further monetary easing, pricing 37 basis points more by the end of the year. 

What our strategists are saying... 

“Brutal as the selling in German bonds was on Wednesday, the markets aren’t done with the theme of higher yields — especially with the idea reverberating across the global economies now” —Ven Ram, Cross-Assets Strategist, Dubai. Read the full post here.

 

German 10-year yields will meet resistance at 3 per cent, according to Evelyne Gomez-Liechti, a strategist at Mizuho International Plc. 

“Markets are still trying to find out what the new equilibrium is, and we wouldn’t fight this adjustment for now,” she said. 

Strategists at firms including Natixis and Union Bancaire Privée also see bund yields potentially reaching 3 per cent this year, a level hit just once in the past decade, as the nation floods the market with more debt.  

Moving to Mobilize 

Germany’s dramatic pivot after decades of fiscal conservatism comes in response to the US dialing down its role in Europe and negotiating directly with Russia on a potential peace deal in Ukraine.  

Now, European leaders are moving swiftly to mobilize additional defense funds to counter the threat of aggression from Moscow. 

The plans “represent an unprecedented break with German fiscal priorities,” said Theophile Legrand, a strategist at Natixis. “The expected increase in supply could lead to a higher term premium.”