Why 10-year Treasury note is taking a hit as Germany ramps up military spending

Dow Jones
07 Mar

MW Why 10-year Treasury note is taking a hit as Germany ramps up military spending

By Vivien Lou Chen

As yields move higher in other countries, 'foreign investors are less interested in longer-dated U.S. Treasurys,' strategist says

Germany is about to enter what its next chancellor, Friedrich Merz, calls a historic "whatever it takes" moment of significant fiscal expansion to ramp up military spending and boost its economy.

Following President Donald Trump's contentious meeting with Ukrainian President Volodymyr Zelensky last Friday, Europe's largest economy plans to rearm itself. The plan, backed by the two political parties that will form Germany's next government, involves loosening restrictions on borrowing that would enable the country to access as much as roughly 1 trillion euros (equivalent to $1.08 trillion).

This has led to a swift rise in Germany's government-bond yields and a rally in its equity market. Germany's DAX index DAX, made up of blue-chip companies, finished at its second-highest closing level ever on Wednesday and was up another 1.6% on Thursday. The 10-year bund yield BX:TMBMKDE-10Y jumped 30 basis points on Wednesday, which was the biggest increase since the months after the fall of the Berlin Wall in November 1989, according to Bloomberg News. That yield rose another 9.7 basis points on Thursday to around 2.9%, a level that hasn't been seen since October 2023.

All of this appeared to be denting the relative appeal of the 10-year U.S. government note BX:TMUBMUSD10Y, which sold off on Tuesday, Wednesday and Thursday - driving its yield up to 4.33% as of New York morning trading. In the bond world, yields rise when prices fall, meaning that the three-day climb in the 10-year yield reflects selling pressure.

Yields tend to rise on a variety of factors that include an improving economic outlook, expectations for higher future inflation and concerns about a country's long-term fiscal trajectory. But they are also influenced by what's happening outside the U.S.

As yields move higher in other countries, "foreign investors are less interested in longer-dated U.S. Treasurys," said Lawrence Gillum, the Charlotte, N.C.-based chief fixed-income strategist for broker-dealer LPL Financial.

One of the reasons long-term yields in Germany have spiked is that "there's going to be a lot more government-debt issuance," Gillum said via phone. The prospect of a deluge of government paper is boosting term premium, or the additional compensation investors demand to hold long-term government debt to maturity. Meanwhile, shorter-term yields remain tethered to market participants' expectations for central-bank moves.

In addition, rising yields in Germany are part of "an improving growth story, given the amount of government spending that's expected," Gillum said. "Investors are demanding more yield to buy Germany's government debt."

As of late Thursday morning, Treasury yields were mixed, with the policy-sensitive 2-year rate BX:TMUBMUSD02Y little changed while 10- and 30-year rates rose BX:TMUBMUSD30Y. All three major U.S. stock indexes DJIA SPX COMP were down but off their session lows after Commerce Secretary Howard Lutnick said tariffs imposed Tuesday on nearly all products from Mexico and Canada will likely get delayed.

-Vivien Lou Chen

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March 06, 2025 11:50 ET (16:50 GMT)

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