#MacroFriday: German bund yield posts largest one-day jump in 35 years

The incoming German government, a coalition of conservatives (CDU/CSU) and social democrats (SPD), has proposed a major overhaul of its debt rule to accommodate increased defense spending and a €500 billion infrastructure program. Future Chancellor Friedrich Merz even framed it as Germany’s own ‘Whatever it takes’ moment to safeguard the country. While these investments will be spread over a decade, the scale of the plan triggered a historic jump of more than 30 basis points in Bund yields on March 5.

Since Germany’s debt brake is enshrined in the constitution, modifying it requires a two-thirds parliamentary majority. Next Tuesday, the German Parliament will vote, with the coalition needing support from the Green Party. So far, the Greens have rejected the proposal. While negotiations for their backing are expected, a plot twist remains possible.

Meanwhile, the ECB has cut interest rates to 2.5%. President Christine Lagarde emphasized that monetary policy has become ‘meaningfully less restrictive’. However, the recent surge in European long-term rates may still drive up borrowing costs for lenders. Government bond yields across Europe climbed in response, with only a slight narrowing of spreads against German Bunds. Unfortunately, not every European country has the fiscal space for large-scale defense and infrastructure investments, especially as rising yields make borrowing for these investments even more expensive.