German Bond Yields Rise As Historic Spending Vote Looms

German bond yields edged higher on Monday ahead of the country’s historic parliamentary vote on a landmark spending package that will allow the nation to invest billions in defense and infrastructure. The yield on Germany’s 10-year bonds increased by two basis points to 2.84%, following a brief dip the previous day. The rate had surged to 2.94% last week, but analysts indicated that the selloff was likely overblown.

Investors remain optimistic that chancellor-elect Friedrich Merz will secure the two-thirds majority needed to approve the historic spending increase. Merz gained political backing from a rival party last week, strengthening his position ahead of the vote. The proposed plan would utilize Germany’s federal budget to modernize the country’s military and overhaul its infrastructure, signaling the end of years of fiscal restraint that many argue have hindered economic growth.

“It’s a historic event, which by definition also means they can’t be as strict as before with European partners,” said Michael Krautzberger, global chief investment officer for fixed income at Allianz Global Investors. “I’m optimistic ahead of the vote.”

Leading investment firms, including Pacific Investment Management Co. and BlackRock Inc., have positioned themselves underweight on euro-area bonds. BlackRock cited expectations for increased debt issuance in the region and concerns that rising government spending could reignite inflation, limiting the potential for additional interest rate cuts.

While yields on German bonds remain elevated, some investors are more comfortable with the prospect of higher issuance, noting that significant increases in debt sales are not expected until next year.

“Given the long-term nature of the proposed spending and the fact that improved growth may not materialize until next year, we believe 10-year bunds around the 3% level offer value over the next six months,” said Daniel Loughney, head of fixed income at Mediolanum.

Many analysts believe that yields are unlikely to rise significantly in the short term. Morgan Stanley’s chief fixed income strategist, Vishwanath Tirupattur, stated that the risk of oversupply is “contained” until next year, while UBS Group AG’s Reinout De Bock predicted that the 10-year yield would top out at 3%.

The anticipation of increased investments and stronger economic growth has also supported the euro, which strengthened to approximately $1.09. This comes less than two months after the currency had plunged to a 20-year low of $1.0141, prompting predictions that it could reach parity with the U.S. dollar.

Asset managers have boosted their bullish positions on the euro to a five-month high, according to the latest data from the Commodity Futures Trading Commission.

The looming fiscal changes have also caused Germany’s yield curve to shift, with longer-maturity bond yields climbing faster than those of shorter-term bonds. Allianz’s Krautzberger expects further steepening, as the gap between two- and 10-year yields reached a two-year high of 72 basis points on Friday.

“We had a long period when yield costs were either shockingly flat or inverted,” Krautzberger noted. “We are now heading toward a more normalized yield curve.”