(Bloomberg) — German 10-year yields rose above the equivalent swap rate for the first time ever, as traders brace for the possibility of more bond sales next year under a government that could be more tolerant of rising debt.
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The difference between the two reversed on Thursday, narrowing to minus two basis points, the lowest reading since Bloomberg started collecting the data in 2007. It comes after German Chancellor Olaf Scholz called for early elections and fired his finance minister, Christian Lindner, who opposes them. to relaxing the rules that severely limit government borrowing.
German opposition leader wants a vote of confidence before next week
The difference between bond yields and swap rates is an important measure of future issuance because bonds tend to weaken against swaps as the market expects more selling. The move accelerates a long-term trend that has been gaining momentum around the world, following investor fears about increased debt supply.
“The collapse of the German government seems likely to contribute to the latest price decline,” Commerzbank AG strategist Hauke Siemssen wrote in a note. “The path to more debt will most likely become easier without Treasury Secretary Lindner.”
The German yield curve steepened on Thursday, another sign of budget concerns. The 30-year yield rose as much as 10 basis points to 2.75%, the highest level since July, while the two-year yield was only four basis points higher at 2.22%.
It is already forecast that sales of German government bonds will be a record next year. Citigroup Inc. strategist Puja Sawant expects net bond issuance to rise to €139 billion ($149.5 billion), a number surpassed only by France. The figure also reflects the debt that will disappear from the European Central Bank’s portfolio as it continues to shrink its assets.
Scholz has argued that Germany needs “more financial wiggle room” to meet its challenges. The country, once Europe’s economic powerhouse, is now grappling with a prolonged decline in the manufacturing sector, which faces higher energy costs and competition from markets including China. Donald Trump’s threat to impose new tariffs is likely to add to the headwinds.
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