Yields on benchmark German government bonds rose on Monday as the outcome of German general elections supported expectations for pro-growth policies, but did not lift the uncertainty around the reform of the debt brake to increase fiscal spending.
Germany’s likely next chancellor, Friedrich Merz, will start trying to form a coalition government on Monday, after his conservative bloc won a national election that saw far-right and far-left parties hoover up support from disaffected voters.
“We expect a two-party coalition between the (conservative bloc) CDU/CSU and the centre-left SPD to enact some pro-growth supply-side reforms,” said Holger Schmieding an economist at Berenberg.
He said populist parties from the political fringes, such as Alternative for Germany (AfD) and The Left, “can veto any loosening of the debt brake enshrined in the constitution.”
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Investors have pinned a lot of hope on a new government reforming the so-called debt brake to increase fiscal spending and boost the economy, especially in light of the pressure from the US government for European countries to pay more for their own defence.
Germany’s 10-year bond yield, which serves as the benchmark for the wider euro zone, was up 2 basis points (bps) at 2.48%.
The 2-year yield rose 1.5 basis points (bps) to 2.12%.
Italy’s 10-year yield was up 3 bps at 3.59%. The yield gap between Italian and German yields was at 106.5 bps.
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