The "historic" fiscal expansion plan stimulates, causing German bond yields to soar, marking the largest increase since June 2022

On Wednesday, German bond yields surged, marking the largest increase in over two years, as the market reacted strongly to Germany's "historic" fiscal expansion plan, anticipating a significant rise in government borrowing.

Data showed that the yield on 10-year German government bonds soared by 23 basis points to 2.73%, the largest increase since June 2022. The euro rose 0.9% against the dollar to 1.0722, on track for the largest three-day gain since the end of 2022.

According to a previous article by Wallstreetcn, incoming German Chancellor Merz reached an agreement with the Social Democratic Party (SPD) on Tuesday to amend the constitution, exempting defense and security spending from fiscal spending limits to "protect the country at all costs." Specifically, defense spending exceeding 1% will be exempt from the debt brake, and major central parties have also agreed to launch a €500 billion (approximately $528 billion) infrastructure fund for investments in priority areas such as transportation, energy grids, and housing.

Deutsche Bank's research report released on March 4 stated that this plan could be "one of the most significant paradigm shifts in post-war German history," comparable to the "German reunification" 35 years ago, and could lead to unlimited borrowing for defense spending at a faster pace. Goldman Sachs analysts indicated that if the plan is quickly approved and implemented, Germany's economic growth rate could reach as high as 2% next year, far exceeding the bank's current forecast of 0.8%.

The market reacted swiftly and positively. The German stock market surged, with the DAX index soaring by 3.5%. German infrastructure companies emerged as the biggest winners, with Heidelberg Materials' stock rising by 14% and Germany's largest steel manufacturer Thyssenkrupp increasing by 15%. The European defense sector continued its strong upward trend, with Rheinmetall rising over 4%.

Merz plans to push these reforms through parliament this month before the newly elected lawmakers take office. Analysts believe this is undoubtedly a significant boon for Germany, which has faced two consecutive years of economic contraction, high energy costs, weak corporate investment, and sluggish consumer demand. Sebastian Dullien, research director at the Düsseldorf Institute for Macroeconomic Policy Research, predicts:

"Economic growth may significantly accelerate as early as the second half of this year, and a normal growth rate of 2% per year may again become possible."

Additionally, regarding the sharp rise in yields, market participants pointed out that this bond sell-off does not reflect concerns about Berlin's debt sustainability—Germany's debt accounts for about 63% of GDP, far lower than other Western powers such as France, the UK, and the US JPMorgan Chase strategist Karen Ward also stated: "The rise in yields is because the market believes Germany is opening the valve for economic growth. This is very favorable for risk assets."