Germany's determination to "spare no effort at all costs" has sparked a huge wave in the bond market, with massive funds betting on the soaring yields of German bonds.

The most popular trading strategy in the European bond market is gaining new momentum: with the significant expansion of fiscal policy by the German government, and the call to "defend the nation and Europe at all costs," the German government bond market is facing the most severe sell-off in over twenty years, betting on a steep yield curve trade - betting that long-term bond prices will perform far worse than short-term bonds, once again sweeping the entire European bond market after the European debt crisis at the end of 2009. This strategy had a "breakout moment" last week - after Germany announced a multi-billion euro defense and infrastructure investment plan, the yield spread between 2-year and 10-year German government bonds hit the largest two-year spread in two years. Top global investment institutions such as Goldman Sachs Asset Management, Duff Global Investment Management, and Nuveen are all increasing their positions in trading steepening European bond curves. The core logic of the market trading is that the surge in government spending will lead to a sharp increase in long-term bond issuance - which also means that the market will demand higher long-term bond investment returns, faster economic growth, and rising inflation - both of these factors are also forcing investors to seek higher returns to hold long-term debt. The latest statistics show that the German benchmark yield curve - the yield on 10-year German government bonds soared 43 basis points to 2.84%, far exceeding the 22 basis point increase in short-term German bonds. The steepening of the German government bond yield curve - investors generally believe that, led by the forces betting on the long-term, the steepening trend of the German bond curve is continuing. "The trend of the steepening of the German bond curve will be the main theme in the financial markets at the end of the year," said Laura Cooper, head of macro credit and global investment strategy at Nuveen. She expects the yield on 10-year German bonds to rise to 3.1%, with the yield on 2-year German government bonds at 2.25%. Although the steepening of the European bond market curve trade has been popular in the global financial markets since the beginning of the year, individual and institutional investors were focusing on the European Central Bank's aggressive rate cut path pressuring short-term interest rates before, driving short-term bond yields to decline much faster than long-term bonds, which is a completely different logic from the recent steepening of bond yields caused by German fiscal spending. This week, the European bond market can be said to be on the verge of a "sudden change": the European Central Bank hints that the interest rate easing cycle may be near its end as inflation cools and European countries prepare to increase fiscal stimulus - the market is starting to bet on a pause in rate cuts in the second half of the year. At the same time, Germany and the entire EU plan to relax deficit rules and significantly increase defense-type spending to boost the economy and national defense system, injecting stronger momentum into the steepening of the European bond market curve trade than ever before. "Financial markets are pricing in the volume of German and even entire Eurozone bond issuance, which will continue to drive the steepening of the German and European bond market curves," said Altaf Kassam, director of investment strategy for Europe, the Middle East, and Africa (EMEA markets) at Duff Global Investment Management. In recent months, as traders prepare for rate cuts by the Federal Reserve amidst a surge in government spending, particularly in interest payment spending, this strategy has also been popular in the US Treasury market. Last week, after the monthly employment report showed signs of weakness and increased bets on further easing policies in the US, this trade betting on a steepening yield curve also gained strong momentum in the US bond market. However, not all institutions agree with this trend. Analyst teams from Jefferies and Toronto Dominion Bank believe that fiscal expansion has already been fully priced in by the bond market, especially pointing out that German bond yields stabilized last Friday, casting doubt on the long-term upward momentum of German and European bond yields. Traders are currently closely watching the details of the EU's broader spending plans and the ongoing trends in US trade policies, which will affect expectations for the interest rate path of the European Central Bank. Currently, the probability of a 25-basis point rate cut in April is only 50%, compared to less than 10% before Germany's call to "defend at all costs." "We are cautious about the long-term perspective on European short-term or front-end bond yields," admitted Simon Dangoor, head of fixed income macro strategy at Goldman Sachs Asset Management. "Given the additional debt issuance demand brought about by fiscal expansion, we prefer to focus on steepening trades, i.e. focusing more on long-term bonds." At all costs! Germany faces the most important fiscal paradigm shift since World War II Facing geopolitical upheavals and economic growth challenges, the German government announced a unprecedented fiscal expansion plan last Tuesday evening, local time, and declared to amend the constitution, pledging to "defend at all costs" to strengthen national defense construction. This historic fiscal stimulus measure will not only profoundly affect the German economy and national defense system itself, but also herald a significant transformation in the economic and national defense landscape of Europe and even the world. Deutsche Bank, a European banking giant, stated in a research report released recently that this plan could be "one of the most important fiscal paradigm shifts in German post-war history," with the possibility of transforming beyond the "two German unifications" 35 years ago, and may allow borrowing for defense spending to be done at an "unlimited" pace. Merz announced this decision by saying: "In the face of recent choices by the US government, Europe needs to strengthen its defense, especially the necessary decisions in federal budgeting, which can no longer be postponed." According to reports, more than 1% of German defense spending may be exempted from the debt brake. Merz also stated that the major political parties have agreed to launch a 500 billion euro (approximately 528 billion US dollars) infrastructure fund to invest in priority areas such as transportation, energy grid, and housing. For a long time, Germany has been known worldwide for its extremely strict fiscal discipline, which has also limited its domestic economic growth, especially since it has been in an economic downturn since the pandemic and the Russia-Ukraine conflict. Many investors have been urging Germany to relax its fiscal constraints, and the ambitious fiscal plan led by Merz is undoubtedly a positive response to these calls, signaling a break in the "iron rule" that Germany has long adhered to regarding government borrowing. GermanyThe slogan "at all costs" has not only triggered a sharp change in the European debt market, but also caused a huge wave in the foreign exchange market. The risk reversals indicator in the foreign exchange options market shows that traders' bullish sentiment towards the euro has reached its highest level in five years. Top investment institutions such as Goldman Sachs, Mitsubishi UFJ Financial Group, and Deutsche Bank have all abandoned their previous pessimistic forecasts that the euro would fall to parity against the US dollar.In recent days, the whole of Europe can be said to be accelerating plans to enhance European military capabilities, including relaxing fiscal rules and possibly establishing an intergovernmental fund in which the UK will also participate. Under the incredibly strong fiscal stimulus in Germany, the European benchmark stock index - the STOXX 600 Index - is expected to continue its bullish trend, with prospects for a "long-term bull market" pushing the benchmark index towards its strongest first quarter performance relative to the S&P 500 in the past ten years. Stocks in the defense industry, such as Rheinmetall, Leonardo, and Thales, have seen a skyrocketing rise in stock prices, with these defense giants driving the European stock market higher since February. After soaring more than 50% in 2023 and 2024, the S&P 500 Index has shown weak performance since the inauguration of US President Donald Trump, mainly due to market expectations of the possibility of the US economy entering a phase of "stagflation" under heavy tariff pressure. Global hot stock trading is now shifting away from the US stock market, especially towards the European and Asian stock markets. Following DeepSeek's impact on Silicon Valley and Wall Street, as well as Alibaba's impressive performance and ambitious AI goals, a large amount of foreign capital is now being repositioned into Chinese assets, particularly Chinese tech stocks, betting that Chinese tech giants will also be core beneficiaries of the global AI boom.