The impact of debt on German bund
11 MAR, 2025
By Mauro Valle from Generali Investments
Mauro Valle, Head of Fixed Income at Generali Investments
The announcement by Germany’s two main parties of a massive fiscal spending program for infrastructure and defence has triggered a 40 bps rise in Bund yields over two days, pushing them from 2.5% to 2.9%. The market has repriced this historic paradigm shift by Germany: according to the announced plan, the country is set to spend approximately 1.5% of GDP (€60 billion) per year on defence and €500 billion over ten years on infrastructure.
Fiscally, this means a higher deficit in the coming years and an upward trend in the debt-to-GDP ratio. On the other hand, this plan will certainly provide a boost to German economic growth in the near future. Leaving aside considerations about what will actually be approved in the coming weeks and the implementation timeline, Germany appears to have the capacity to sustain such a fiscal stimulus without jeopardizing its AAA credit status for now.
Bund yield prospects are not easy to decipher at the moment, given that net supply is bound to increase. Additionally, there are uncertainties stemming from the protectionist policies of the Trump administration. It remains unclear what tariffs will be applied to Europe and whether their impact will be felt more on inflation or growth.
Against this backdrop, the ECB has cut its key rate by 25 bps, bringing it down to 2.5%. However, the final level of monetary policy tightening is now more uncertain. Lagarde stated that the ECB is data-dependent, given the high level of uncertainty, in a context where rates are deemed “significantly less restrictive.” However, after the recent rate movements, the German real rate has reached its highest level in the past ten years.
French and Italian bond spreads have remained stable in recent days, as German fiscal stimulus is expected to have a positive impact on these countries’ growth as well. Moreover, Germany’s increased fiscal spending will reverse the divergent trend in fiscal policies across countries.At this point, it is difficult to determine whether a Bund yield close to 3% is still a level to remain defensive or rather an opportunity to buy. While uncertainty remains high, the outlook for peripheral bonds remains positive for now.
