Weak data reinforces expectations of interest rate cuts, German bonds ignore the peak of bond issuance and rebound strongly.

On Wednesday, German government bond yields widened their gains. Weak economic data prompted traders to increase bets on a rate cut, offsetting the expected impact of a surge in debt sales. The benchmark 10-year German bond is on track for its largest three-day consecutive gain since September, with yields remaining near their lowest levels since December 5. The 30-year bond yield has fallen to 3.42%, after hitting a high point in the past month that was the highest in 14 years. Lower-than-expected retail sales data and reports of slowing inflation highlight the challenges facing the eurozone's largest economy. The money markets have increased bets on a rate cut, pushing back the timing of the European Central Bank's first rate hike to early next year. Just this Monday, the market was predicting the hike to happen in December. Mohit Kumar, chief economist and strategist at Jefferies International, quoted the company's proprietary index to suggest that the accumulation of short positions in German government bonds "looks somewhat overdone." He recommends allocating to short-term German bills, as their performance will outperform long-term U.S. government bonds. German government bond yields may see their biggest single-day decline since September The 10-year German new bonds issued on Wednesday received 1.29 times the amount of bids, significantly lower than the previous issuance. However, the sales amount nearly doubled, reaching 4.5 billion euros ($5.3 billion). The substantial increase in the issuance size this year may limit the upside potential for German government bonds, especially long-term varieties. But Wednesday's market trend indicates that, at least for now, concerns about weak economic performance are dominating. "In jeopardy" state Citigroup's Economic Surprise Index (measuring the divergence of eurozone data from market expectations) has dropped to its lowest in over a month, suggesting investors may have been too optimistic about the region's economic growth. German Chancellor Friedrich Merz described parts of the country's economy as being in a "very critical" state and pledged that revitalizing growth would be his government's top priority this year. Merz is attempting to turn around the economic downturn through a massive long-term spending plan aimed at repairing infrastructure and modernizing the armed forces. As part of this plan, Germany will increase its federal debt sales by one-fifth by 2026, reaching a record 512 billion euros. Axel Botte, market strategy head at Ostrum Asset Management, said, "German bond markets have already digested the impact of fiscal stimulus from Germany." He added that the 10-year German bond yield is expected to hover around 2.80% for the full year of 2026. Macro strategist Wen Ram said, "Today's rebound must be seen against the backdrop of a softening inflation narrative in Germany and France, prompting some short positions to take profits after a rise of over 25 basis points in long-term German bond yields over the past two months. The factors that triggered the previous spike in yields - including record borrowing due to Germany's fiscal expansion, weakened demand for long-term bonds in the context of pension fund reforms in the Netherlands, and a rise in premia term - are still factors that need to be addressed in the short term." The UK's 10-year bond yield dropped 7 basis points to 4.41%, potentially hitting its largest single-day decline since November. The 30-year yield dropped 8 basis points to 5.15%.