Germany's Bond Market Reacts to Regional Elections as Yields Hit One-Month High

Germany's 10-year bond yield reached a one-month high due to increased bond supply and the impact of recent regional elections. The Alternative for Germany (AfD) party's success in Thuringia was notable, but experts do not expect long-term damage to the ruling coalition. Euro zone bond supply will rise after a summer break.

Germany's 10-year bond yield surged to a one-month high on Monday, driven by a rise in bond supply as the summer lull ended, and the results of two regional state elections. The Alternative for Germany (AfD) emerged victorious, securing over 33% of the vote in Thuringia, marking the first far-right regional election win since World War Two.

Despite the immediate effects, Commerzbank analysts do not foresee lasting damage to Germany's governing coalition. Rainer Guntermann, a rates strategist at Commerzbank, commented, "Domestic political headlines following the disappointing results for federal coalition parties in the regional elections are unlikely to have a lasting impact."

He added that while the election results might heighten conflicts within the coalition, a break-up and new elections are improbable. Germany's 10-year bond yield, a benchmark for the Euro zone, rose by 3.5 basis points to 2.327%, the highest since July 31, while the two-year yield increased by 2.5 basis points to 2.411%. Analysts noted that the resumption of Euro zone bond supply this week could further affect prices.

Italy's 10-year bond yield also climbed by 4.5 basis points to 3.738%, widening the yield gap between Italian and German 10-year bonds to 141 basis points.

(With inputs from agencies.)