(Bloomberg) -- Bond yields climbed on Monday as European leaders discussed support for Ukraine and improved security measures for the continent, prompting investors to prepare for a surge in defense spending.
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The rate on German 30-year securities advanced 10 basis points, the most in four months, to hit 2.81%. UK and French yields also rose, while defense stocks buoyed European indexes and the euro strengthened.
The two parties likely to form Germany’s next government are exploring options for large-scale investments in defense and infrastructure as Europe eyes massive spending to boost the continent’s security. Officials are considering setting up two funds potentially worth hundreds of billions of euros for defense and infrastructure, Reuters reported.
“It would be a fiscal regime shift of historic proportions,” said Robin Winkler, chief German economist at Deutsche Bank AG, in a client note. “If reports over the weekend prove correct, the two funds would add up to a significant fiscal impulse.”
One pressure valve that is sensitive to changes in the supply of German debt — the bund swap spread — fell to a record low in data going back to 2007, reflecting the concern among investors who will be tasked with absorbing more sales.
The rise in bond yields and the euro was exacerbated by data showing euro-area inflation slowed less than expected in February, suggesting the European Central Bank is getting closer to ending its rate-cut cycle.
What Bloomberg strategists say:
“With inflation still simmering away and European leaders contemplating spending for defense on a scale not seen in years, the steepening of the German yield curve will find little respite just yet.”
— Ven Ram, Cross-Assets Strategist, Dubai
The euro rose 0.7% against the dollar to $1.0444 as a gauge of the greenback pulled back from a two-week high. Germany’s benchmark stock index jumped as much as 1.2%, led by a surge in defense stocks and outperforming euro-area peers.
“Higher German/European defense spending has the potential to be transformational for the whole of Europe,” said Ales Koutny, head of international rates at Vanguard Asset Management Ltd. “This should lead to slightly higher yields across Europe, but significant strength and stability for the euro.”
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The moves in European markets helped boost global risk appetite, which has been on the rise since late Friday amid US equity gains and an advance for crypto over the weekend. US yields also climbed, with the 10-year rate up four basis points to 4.24% ahead of the publication of US ISM data for February. US stock futures gained.
For some, the bond gains have been sufficient to induce covering of bets targeting higher yields. “A lot of the expected supply is now in the price,” said Mike Riddell, portfolio manager at Fidelity International.
--With assistance from Alice Atkins and Naomi Tajitsu.
(Updates German yield moves in the second paragraph)
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