Update Bonds: Structural shift in eurozone bonds
German Bunds have been the gold standard of safety for as long as I can remember. They were the benchmark against which all other eurozone bonds were measured, and the differences between yields (spreads) told the story. But times are changing, and so is the story of the German Bund.
Longer-dated German Bunds, in particular, have been suffering, with the 30-year yield hovering around levels seen when the European Central Bank (ECB) started cutting rates. This is not just a reaction to global rate movements and an expected increase in global debt (mainly from the US) -- it’s about Germany itself.
The country’s Bunds used to be scarce as a result of fiscal discipline, which in turn drove prices up and yields lower, but with the letting go of the German balanced budget amendment also known as the “debt brake” things have changed. Germany is about to issue more debt than ever -- over EUR 500 billion through 2026 -- to fund critical investments in defence, infrastructure and energy. This marks a significant shift for a nation that has long prided itself on fiscal prudence. Add to this the effect of quantitative tightening (the ending of the quantitative easing programme and the decision not to buy back bonds that mature on the European Central Bank’s balance sheet), and the market is now setting the price.
But there’s more to it than supply and demand. Germany’s political landscape is becoming less predictable. The rise of the far-right AfD, now polling as the country’s most popular party, is introducing uncertainty. And the uncertainty it could create is already being priced-in to Bund yields. Germany, the bedrock of eurozone stability, is starting to feel a little less stable.
This effect is also felt across the eurozone in a way that is easily overlooked. Peripheral bond spreads, like those of Italy and Spain, are narrowing -- not because these countries are suddenly less risky (in part), but because Bunds are absorbing more risk themselves. The benchmark is moving, and that changes everything. Noteworthy here is also the situation in France, which is facing similar difficulties. Its government bond spread is now higher than that of Spain, and the gap with Italy is shrinking fast. The narrative surrounding core and peripheral eurozone debt is about to take a turn, with the EU looking increasingly toward joint debt issuance.
For investors, this means rethinking old assumptions. Germany’s Bunds may no longer be the unquestioned safe haven they once were. The eurozone bond market is entering a new era, and we’d better pay attention.