There Are Weeks When Decades Happen
18 MAR, 2025
By Axel Botte
Author: Axel Botte, Head of Market Strategies at Ostrum AM(affiliate of Natixis IM)
Germany’s ambitious infrastructure plan and the increase in defence spending across Europe mark a significant turning point in fiscal policy. The yield on the German 10-year bond has risen by nearly 50 basis points, reaching 2.90%, while the US Treasury bond remains around 4.25%, caught between disappointing economic data and uncertainty over tariffs. In equity markets, US technology stocks are retreating, whereas European indices continue to rise. Overall, spreads remain stable, and the dollar is experiencing a notable decline.
Is Germany on the brink of a cultural revolution? With €400 billion allocated to military spending and an additional €500 billion for infrastructure investment, Germany’s historically strict fiscal constraints have finally been lifted in response to pressing security and economic challenges. Furthermore, the European defence plan will reach €800 billion over four years, with €650 billion financed by member states and the remainder coming from EU loans (€150 billion in reassigned credit).
In the US, headlines continue to be dominated by Donald Trump’s conflicting announcements on tariffs. The US administration is facing a cyclical slowdown, marked by a concerning trade deficit of $131 billion in January and a decline in consumer confidence. The labour market is slowing, impacted by federal layoffs and a political environment unfavourable for investment and job creation. However, February saw the creation of 151,000 new jobs, with a slight increase in the unemployment rate to 4.1%. The only positive note comes from the ISM services index, which remained steady at 54 in February.
Financial markets are reacting positively to Europe’s initiative: the euro is rising to $1.09, and the sharp increase in the Bund yield (+30 bps on Wednesday, its largest one-day rise since reunification) has not significantly affected stock markets, despite profit-taking following the February employment report.
As expected, the ECB has cut its deposit rate to 2.50% (-25 bps) while raising its inflation forecast to 2.3% for 2025. A pause is being considered in April, but it appears this monetary tightening cycle will continue until rates reach 2%. The yield premium on long-term German government bonds (Bunds) is attracting institutional interest, with the 30-year Bund peaking at 3.16% midweek. However, the Bund rally is not affecting sovereign spreads, which have remained stable throughout the week, with the OAT trading at 70 bps. Swap spreads are tightening, with the 10-year swap spread falling below -10 bps.
Credit spreads remain within a narrow range. The asset swap spread for euro investment-grade debt currently stands at 83 bps. The primary market continues to demonstrate strength, with €80 billion per month expected in 2025, supported by positive net fund inflows (+€1 billion per week in 2025) and a rebound in new issuance premiums.
High-yield spreads (289 bps over swaps), while expensive, are withstanding extreme rate volatility. Emerging market debt remains firm amid a sharp decline in the dollar. Retaliatory measures from countries affected by Trump’s policies have reversed the relationship between tariff hikes and the value of the dollar. Concerns over the US economy and political uncertainty are prompting rotations away from US technology stocks.
Meanwhile, European markets are showing resilience, driven by the financial sector and cyclical stocks, which stand to benefit from military and infrastructure spending plans. The Euro Stoxx 50 is projected to rise by 12% in 2025.
