Bund selloff continues as markets digest German spending plans, ECB rate cut

Germany's 2-year yield, more sensitive to ECB policy rates, rose after the rate decision and was last flat on the day at 2.234%. It jumped 22.5 bps on Wednesday, in its biggest daily rise since March 2023.

Benchmark Bund yields rose again on Thursday after recording their biggest daily rise in more than 25 years the previous day, as Berlin's plans for a huge spending package led investors to expect a sharp increase in German bond supply. Yields ticked higher after the European Central Bank cut interest rates by 25 basis points to 2.5% as expected, but revised up its near-term inflation forecasts.

Germany is in for a massive ramp-up in spending, with a 500 billion euro ($540.90 billion) special fund sought for infrastructure and plans to unshackle defence investment from restrictive borrowing rules. "Given inevitable lags in fiscal policy, additional spending could only start to filter through to the economy later this year and into 2026," said Mark Haefele, chief investment officer at UBS Global Wealth Management.

"But despite these caveats, the bold fiscal plan has the potential to boost growth and support euro zone assets," he added, mentioning a possible lift to confidence and an improving backdrop for equities. Yields on 10-year Bunds were up 7 basis points at 2.849%, after hitting 2.929%, their highest since October 2023.

They jumped more than 30 bps on Wednesday, recording the biggest daily rise since May 1997. Yields move inversely to prices. Markets trimmed bets on further ECB rate cuts after the central bank said in its policy statement that its economists now expect inflation to average 2.3% this year, reflecting stronger energy prices.

Traders are pricing in an interest rate of around 2.08% in December, from 1.92% late on Tuesday before the German fiscal announcement. Germany's 2-year yield, more sensitive to ECB policy rates, rose after the rate decision and was last flat on the day at 2.234%.

It jumped 22.5 bps on Wednesday, in its biggest daily rise since March 2023. ($1 = 0.9244 euros)

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