German Debt Has Worst Day Since Aftermath of Berlin Wall’s Fall #NewsGerman

“Even if some of this plan is tweaked during the implementation stage, it is clear that the policy shift is generational,” said James Bilson, a fixed-income strategist at Schroders. “We see this shift in emphasis as not only important for Germany but also paving the way for a greater impulse from other Eurozone countries.”

The moves were supported by a Bloomberg report on Wednesday that Germany called for the European Union to reform its fiscal rules to allow countries to make bigger defense expenditures without running afoul of the bloc’s budget rules. European Commission President Ursula von der Leyen had already proposed the bloc extend €150 billion in loans to boost defense spending and loosen fiscal rules constraining national spending.

“These impressive plans underline that the authorities are thinking big and funding capacities could be maxed to the limit in coming years,” said Christoph Rieger, head of rates and credit research at Commerzbank AG.

The 10-year German yield has risen over 40 basis points so far in 2025, more than other bonds in the region, and a measure of its attractiveness relative to swaps has hit successive record lows in data going back to 2007.

Still, German yields remain the lowest among nations in the euro area, reflecting years of fiscal conservationism that have left the country with a limited debt pile. Despite the volatility, the country sold €6 billion in new 30-year bond via banks on Wednesday.

Economic Boost

One side effect of Germany’s new fiscal impulse could be a boost to the bloc’s economy. The country’s unwillingness to spend has been long been pinpointed as a reason for sluggish growth, particularly compared to the US.

What Bloomberg strategists say….

“Germany has thrown off its self-imposed straitjacket of fiscal rectitude, and is planning to embrace borrowing on a scale it has not attempted to do so before… But this is not a repudiation of the country’s debt, the kind seen in the Truss debacle in the UK, and the recent budget travails in France. That’s clear from German asset swaps.”

—Simon White, Macro Strategist, London

European Central Bank officials may address the impact on their growth and inflation outlooks on Thursday, and traders have already started to pare bets on further interest-rate cuts. Swaps imply 67 basis points of easing by the end of the year, compared to 84 basis points before the German announcements on Tuesday.

The improved economic outlook and potentially less monetary easing has bolstered demand for the euro. Hedge funds are placing wagers that it will gain more than 10% in coming months to $1.20, a level last seen in 2021.

Options sentiment, as depicted by so-called risk reversals, turned the most bullish the euro in five years, while data from the Depository Trust & Clearing Corp. show that two out of three options this week targeted a stronger euro.

The rally has also seen the likes of Goldman Sachs Group Inc., MUFG and TD ditch predictions that the common currency will fall to parity with the dollar this year. Firms including Deutsche Bank and Societe Generale are now recommending buying the euro.

“It feels like a game changer,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. He said he has been adding to his fund’s long euro position since Merz’ announcement.

–With assistance from James Hirai.

(Updates with closing bond prices.)

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