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German borrowing costs surged on Wednesday after chancellor-in-waiting Friedrich Merz agreed a historic deal with his probable coalition partners that would relax the country’s strict “debt brake” rules to fund investment in the military and infrastructure.
The yield on the 10-year Bund surged 0.18 percentage points to 2.66 per cent, its biggest one-day move since 2020, as investors braced for extra borrowing from the government.
Merz said late on Tuesday that his party and the rival Social Democrats (SPD) would jointly present a bill next week to relax the country’s strict borrowing rules.
“This fiscal sea change will permanently alter the way that Bunds are trading,” said Tomasz Wieladek, chief European economist at asset manager T Rowe Price.
He added that the steep rise in yields “will raise the financing costs for all other sovereigns in the euro area significantly”.
The euro rose 0.7 per cent against the dollar to $1.069, its highest since November.
Investors regard Germany’s debt as the benchmark risk-free asset for the entire Eurozone but its bonds have historically been in short supply because of its reluctance to borrow heavily.
France’s 10-year government bond yields were dragged higher, with the yield up 0.13 percentage points to 3.36 per cent.
Germany’s Dax index, which had tumbled on Tuesday after the US imposed tariffs on some trading partners, surged 3 per cent in early trading.
German infrastructure companies were among the biggest gainers, with Heidelberg Materials up 11 per cent, while Bilfinger rose 17 per cent. Thyssenkrupp, Germany’s largest steelmaker, gained 14 per cent.
Europe’s defence sector extended a blistering rally. Shares in Rheinmetall, Germany’s largest defence company, were up 5.7 per cent while Paris-listed Thales rose 6.6 per cent.
“Everything you thought you knew about Germany’s economic prospects three months ago, or even three weeks ago, should be ripped up and you should start your analysis from fresh,” said Jim Reid at Deutsche Bank.
The continent-wide Stoxx Europe 600 was up 1.4 per cent.
Asian stock markets earlier rebounded after comments from US commerce secretary Howard Lutnick that implied tariffs could be lowered on America’s neighbours.
Futures contracts tracking the US S&P 500 index were up 0.6 per cent. The dollar slipped 0.4 per cent against a basket of six currencies including the euro and pound.
Lutnick’s comments came after US President Donald Trump on Tuesday hit imports from Canada and Mexico with a 25 per cent tariff and imposed an additional 10 per cent tariff on Chinese imports, on top of a 10 per cent levy set last month.
In his first major policy address to Congress, Trump said tariffs would cause “a little disturbance”.
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