Global bond markets experienced volatility due to Germany’s EUR 500 billion infrastructure and defence spending plans, coupled with changes to the Debt Brake. The EU has also introduced an EUR 800 billion defence package, leading to underperformance of German and EU bonds compared to swaps and US Treasuries.
Attention turns to Germany, where the infrastructure plan is anticipated to pass soon. Analysts suggest going long on 10Y Bunds following a notable rise in Bund yields of approximately 40 basis points last week.
Rating Developments In Europe
In rating developments, Greece was upgraded to A, while France faces potential downgrading to A+ by Fitch. Significant events include a expected EU syndicated deal, along with auctions from Italy, Germany, and possibly Portugal.
The volatility seen in global bond markets stems largely from expanded fiscal commitments in Europe. Germany’s sizeable infrastructure and defence plans, combined with adjustments to the nation’s strict spending constraints, have already put pressure on yields. On a broader scale, the European Union’s decision to move forward with a large-scale defence package has compounded this effect, resulting in German and EU bonds underperforming relative to swaps and US Treasuries.
Germany’s government appears close to finalising its infrastructure plan. Given this, and considering the sharp move in Bund yields last week, analysts see an opportunity in positioning for a reversal. With yields having climbed roughly 40 basis points, some expect the market to stabilise, making 10-year Bunds an appealing option at current levels.
Meanwhile, shifts in credit ratings are reshaping the borrowing outlook across Europe. Greece has now returned to an A rating, reflecting improved fiscal conditions. By contrast, France is at risk of a downgrade, with Fitch potentially cutting its rating to A+. This could add pressure on French government bonds, particularly if investors demand higher yields to compensate for perceived risk.
Upcoming Bond Issuance
The coming days will bring a flurry of debt issuance. The EU is preparing to execute a syndicated deal, a method often used for larger funding rounds. Italy and Germany are also set to auction bonds, while Portugal may follow. These sales will provide the market with fresh indications of demand and pricing dynamics.
For those navigating derivatives markets, this mix of fiscal developments, credit shifts, and upcoming issuance offers opportunities. It also requires attention to spreads, as European bonds continue adjusting to new fiscal realities while responding to external comparisons with US Treasuries.
