Published by Global Banking and Finance Review
Posted on May 30, 2025
By Stefano Rebaudo
(Reuters) -A global selloff in government bonds due to concerns over high debt and bond sales has not left the euro zone unscathed, but Germany's growing safe-haven status should shield the bloc from an excessive rise in long-term borrowing costs.
Major bond markets from the United States to Japan and Europe have seen their bond curves steepen sharply - meaning long-term bond yields have risen faster than short-term yields - a challenging environment for issuers.
Germany's 30-year bond yields have jumped around 40 basis points so far this year, in a move largely driven by the creation of a 500 billion euro ($546 billion) infrastructure fund and an easing of strict borrowing rules to help lift defence spending.
Yet investors and analysts say that a sharp steepening across euro-area bond markets is likely to fade from here, as a relatively better debt trajectory for Germany and global tariff uncertainty bolsters the safe-haven appeal of Bunds.
In an early indication of the trend, the gap between 2-year and 10-year German bond yields looks set to end May with its first monthly drop in over a year, sliding seven basis points (bps) to 74 bps.
An increase in the curve slope can create challenges for highly indebted countries, which will face higher costs when they issue new bonds, as recent weak auction results in Japan and the United States highlight.
It can also complicate the monetary policy outlook by triggering an unwanted tightening of financial conditions.
But in Germany's case, the steepening pressure is easing for a few reasons. Higher bond supply is now priced in. Tariff uncertainty means the European Central Bank is likely to remain in easing mode. And, compared to its peers, German debt dynamics make it a better place to park cash in times of stress.
Amundi's global fixed income investment officer Gregoire Pesques said Europe's biggest asset manager had taken profit on some curve steepening trades.
"In Germany, we are short 2-year bonds, short the 30-year bond, and long the 10-year bond," he said.
Pesques mentioned the possibility of a more dovish than expected ECB outlook given low energy prices and a strong euro, adding there was a lack of appetite for 30-year bonds as a repricing of expectations for more bond supply is under way.
The euro is up around 9% this year against the dollar, and oil prices have fallen around 13%, helping dampen inflation.
Konstantin Veit, portfolio manager at bond giant PIMCO, said he saw a plausible new range of 2.5 to 3.5% for 10-year Bund yields given German fiscal plans, assuming an ECB policy rate of 2%.
Germany's 10-year Bund yield is trading around 2.5%, up around 15 bps so far this year, while its UK and U.S. peers are down eight and 15 bps respectively.
Germany's yield curve is currently steeper than the United States' because the ECB has almost completed its easing cycle, while the U.S. Federal Reserve is expected to cut rates mostly in 2026, analysts said.
STRONGEST LINK
Debt sustainability is also on investors' minds after the U.S. suffered a sharp bond selloff in early April, with investors questioning the safe-haven status of U.S. Treasuries.
Since then, ratings agency Moody's has stripped the United States of its remaining triple-A credit rating and a recent 20-year bond sale was met with tepid demand.
In contrast, though German debt is also rising, Europe's biggest economy is the only G7 member with a debt-to-GDP ratio below 100%, bolstering its safe-haven credentials.
Notably, when U.S. and other major bond markets sold off in April, the Bund market held firm.
Ratings agency S&P argues that German fiscal stimulus, expected to bolster long-term growth, supports the country's triple-A credit rating.
Consultancy Saltmarsh Economics estimates that even without any nominal GDP growth, an extra 325 billion euros of debt would push Germany's debt-to-GDP ratio up to 70%, from current levels around 63%. And an extra 750 billion euros of debt would increase it to a still very low 80%.
"Germany is unique in its fiscal conditions and has room to do more, but other (European) countries will have to compensate for higher defence spending in their budget," said PIMCO's Veit.
We don't think European fiscal policy will be very expansionary in the next couple of years," he added.
(Reporting by Stefano Rebaudo; Editing by Dhara Ranasinghe and Joe Bavier)
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