Rates Spark: Back to fiscal plans

Tensions in the Middle East are easing, and as far as the market is concerned, it is already time to move on. A clear signal is an oil price that has remained below US$70/bbl despite further exchanges in hostilities between Israel and Iran.

There is still some remaining uncertainty regarding the ceasefire. However, EUR rates markets are now closely eyeing the impact of fiscal changes now that Germany has published the outlines of its finance planning for the current legislature: net new borrowing of €143bn this year, €172bn in 2026 and rising to €185bn by 2029 as defence spending is ramped up faster than expected. The updated issuance plan of the debt agency for the upcoming quarter saw a €19bn increase, of which €15bn is via the bond market, and more adjustments are to come in the fourth quarter.

The improving risk sentiment alongside the refocus on the fiscal side briefly pushed the 10y Bund yield close to 2.57%. More noticeable was the underperformance versus Gilts (over 4bp) and Treasuries (over 6bp). The underperformer, however, was 30y Bunds which temporarily rose up to 9bp as headlines indicated the debt agency was still looking at the possibility of issuing 50y bonds next year. Later, the wording of the head of the debt agency suggested such considerations were less imminent, allowing for some recovery in long-end bonds.

Still, 10y Bund yields are now only 1bp below swaps. And looking at the longer run finance planning, we still believe that Bunds should structurally trade above swaps, eyeing the 10-15bp range.