Global Bond Sell-Off Escalates as Germany Shakes Markets

German Debt Shock Sends Global Yields Higher

A major bond sell-off intensified on Thursday as Germany's surprise fiscal move rattled global markets. The yield on Germany’s 10-year Bund surged to 2.85%, following its biggest spike in almost 30 years. This ripple effect drove up borrowing costs across Europe and Japan, sparking investor concerns about fiscal policy shifts worldwide.

Why Are Global Yields Rising?

Germany’s decision to boost spending broke its traditional fiscal restraint, triggering alarm in the bond market. This move contrasts with recent global trends, where major central banks, including the European Central Bank (ECB), are expected to cut interest rates to support economic growth.

Key Market Reactions

• European Bonds: Yields on French and Italian debt rose, mirroring Germany’s surge.
• Japanese Bonds: Japan’s 10-year yield hit a 16-year high of 1.51%, driven by rising inflation and economic growth.
• US Treasuries: Yields on 10-year US bonds climbed to 4.30%, impacted by Europe’s turmoil.

The Bigger Picture: Fiscal Expansion vs. Debt Risks

Germany's increased spending is seen as a positive for economic growth but raises concerns about broader fiscal stability. Unlike France, the UK, and the US—whose debt levels exceed 100% of GDP—Germany’s debt remains at 63%, making its situation less precarious.

Investors, however, fear that rising borrowing costs could put pressure on countries with higher debt burdens. This could lead to a reassessment of global fiscal positions, with more scrutiny on government spending sustainability.

Stock Market Reactions

Despite bond market turmoil, German stocks hit a record high, with companies like Siemens Energy surging 6% on expectations of benefiting from the spending boost. However, US stocks took a hit, with S&P 500 futures down 1.2% and the Nasdaq 100 falling 1.4%.

What’s Next for Global Markets?

The global bond market is at a turning point. The world’s total sovereign bond issuance is projected to hit a record $12.3 trillion in 2025, driven by fiscal stimulus measures. As investors adjust to this new landscape, borrowing costs may continue to rise, shaping economic policy decisions worldwide.

Conclusion: The Future of Bond Markets

Germany’s unexpected move signals a shift towards fiscal expansion, which could push other countries to follow suit. However, this also raises concerns about debt sustainability and higher borrowing costs. With central banks balancing inflation and economic growth, the coming months will be crucial in determining whether bond yields stabilise—or if further turbulence lies ahead.

Source: (FT.com)