Traders across the globe are monitoring updates to U.S. President Donald Trump’s trade policy.
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Government borrowing costs rose across the globe on Thursday, although German bond yields came off highs after recording their biggest daily jump since the country’s reunification 35 years ago on Wednesday.
Bond prices and yields move in opposite directions, meaning that yields tick higher when the value of the asset declines.
Yields on German government bonds — known as bunds — skyrocketed on Wednesday, with the yield on the 10-year debt instruments adding around 30 basis points. The sell-off came after lawmakers from parties widely expected to form Germany’s next coalition government agreed to plans to reform historic debt policy rules to allow an increase in national defense spending.
German government borrowing costs continued to rise for most of Thursday but came off highs toward the end of the day.
The yield on the 10-year bund, seen as a benchmark for the wider euro zone, ticked lower in the afternoon after earlier rising by 11 basis points. The yields on 5- and 20-year bunds ended around the flatline, after also trading higher earlier in the day. The DAX index, meanwhile — home to Germany’s biggest companies — touched on a record high on Thursday.
Deutsche Bank research strategist Jim Reid said in a note to clients on Thursday morning that Germany’s political gear shift had helped fuel a greater appetite for riskier assets in Europe.
“In terms of reactions, the rise in the 10-year bund yield was the biggest daily jump since German reunification in 1990,” he said, noting that the euro and Germany’s DAX index had jumped in the wake of the news. “There’s no doubt that markets are pricing in a once-in-a-generation policy regime shift, which has brought about a huge risk-on move for European assets.”
“In terms of the drivers behind the sell-off, anticipation of a fiscal boost to demand was front and center as evidenced both by the outperformance of German stocks and the rise in inflation expectations,” analysts at Rabobank said in a note out on Thursday morning, pointing to 10-year euro zone inflation swaps jumping by 14 basis points in the wake of political news out of Germany.
Dampened appetite to lend to governments was seen across Europe on Thursday, with yields edging higher on bonds across the region.
The upward move in European borrowing costs also comes ahead of the latest monetary policy update from the European Central Bank. Markets are anticipating a quarter-point rate cut when the central bank announces its decision later on Thursday, which would bring the euro zone’s core interest rate down to 2.5%.
Italian and French 10-year bond yields also ended the day slightly lower, coming off highs seen earlier in the day.
The yield on U.K. 10-year government bonds – known as gilts – closed flat, after earlier rising 6 basis points. Earlier this year, U.K. government borrowing costs hit multi-decade highs amid rising economic uncertainty.
In Asia trading, the bond sell-off extended into Japanese markets, with the yield on Japan’s 10-year government bonds gaining 8 basis points during Thursday trading hours.
Naeem Aslam, chief investment officer at London’s Zaye Capital Markets, told that traders should monitor bond yields in Japan, some of which came near 16-year highs on Thursday.
“Watch Japan’s rising yields despite capped rates — [they] could signal broader market tension,” he said in emailed comments.
In the U.S., the yield on the benchmark 10-year Treasury was last seen trading 4 basis points higher at around 4.3148%.
Marc Ostwald, chief economist and global strategist at ADM Investor Services, told on Thursday that he saw two main drivers behind the global bonds sell-off.
“One is the fear that Trump’s tariff wars will be inflationary,” he said in emailed comments.
He added that the “‘whatever it takes’ 2.0” approach to European defense of Friedrich Merz, who is likely to become Germany’s next chancellor, was also piling pressure on bond prices.
“[This], which along with EU commitment to ramp up defence spending by [around] 800 billion euros ($864 billion), implying a big increase in government borrowing, [comes] at a time where debt loads outside of Germany are at record levels, Ostwald said.
Ralf Preusser, global head of G10 rates and FX strategy at Bank of America Global Research, told by email on Thursday that markets were struggling with three areas of uncertainty globally: tariffs, geopolitics and U.S. fiscal policy.
“While the details of all of these matter, for now the uncertainty shock dominates, in a way the rates market is finding difficult to price,” he said. “The Fed may struggle to deliver quick cuts given inflation risks, Europe is no longer funding the U.S. fiscal expansion, but its own, [and] tariffs and geopolitics are still more damaging for the rest of the world than the U.S.”
In Europe specifically, Preusser said Germany’s new political footing was challenging Bank of America’s outlook.
“Germany is delivering a paradigm shift in its fiscal stance,” he said. “We believe 10y bund [yields] could reach 2.75% in response. This considerable departure from our base case is not the only challenge to our assumptions for 2025: the correction in U.S. equity markets and the rally in front-end U.S. rates suggest we may need to rethink the risks around our forecasts more broadly.”
Emmanouil Karimalis, rates strategist at UBS Investment Bank, also said that the market had “clearly” responded to Germany’s proposed fiscal reforms, as well as the European Union’s ReArm Europe plan.
“These plans suggest a significant increase in issuance patterns due to the urgent need to boost defence spending in Europe,” he said in emailed comments Thursday. “Consequently, investors demand higher premia to absorb the expected increase in supply. While there are also implications for growth and inflation, we believe that the fiscal news and supply considerations have dominated this week.”
