Investors say Europe spends more on defense to increase fuel on the country’s long-term borrowing costs, which increases their expectations that they will increase debt issuance.
Long-term borrowing costs have risen in large economies such as Germany and the UK in recent months, partly due to expectations for more sovereign debt supply.
As U.S. President Donald Trump works to end the Ukrainian war and warns the region of losses to its safety. The yield curve on European sovereign debt reached its steepest trend in the two years this month as long-term borrowing costs rise faster than short-term yields, a proxy for supply expectations.
"The deficit will increase and there is a need to increase defense spending," said Mark Dowding, chief investment officer for fixed income at RBC Bluebay Asset Management.
That is mixed with inflation risks and the "uncertainty premium" brought by the new U.S. government to promote long-term borrowing costs, he said.
RBC Bluebay has poured a steeper production curve in Europe and the United States this year, a popular bet for asset managers.
Since early December, Germany's 10-year bond yield has reached 2.5%. Its spread in 2-year yields has reached nearly 0.4 percentage points, the biggest gap since the end of 2022. What is expected to grow defense spending is that the country will reform its constitution’s “debt brake” and increase borrowing and raise it to speculation. After Sunday’s election, a financial stimulus package was backed up.
“Although Germany has a lower fiscal deficit, the greater pressure on long-term movement is due to the increased defence spending and uncertainty released by debt brakes that increase more borrowing and wider deficits,” said Mitch Reznick, fund manager at Federated. . Hermes is also making steep deals on European debt.
Pooja Kumra, rate strategist at TD Securities, said the recent rise in long-term borrowing costs reflects the “risk of the EU need to announce spending bazooka to meet its defense commitments”.
Department of Defense stocks soared this week as investors raised expectations of greater defense spending. However, it is unclear how much additional spending will be or how it will be funded.
The EU said last week that it would temporarily simplify its fiscal rules so that countries can spend more on defense. The UK has pledged to develop a "pathway" to increase defense spending from 2.3% to 2.5% of GDP, but the move to relax fiscal rules, which was established in October alone, could be received poorly by investors.
"This is another source of rising pressure on financing for debt to GDP (ratio). He said the EU needs a "speed initiative to raise funds to show that they are serious about the increase," said Frank Gill, a leader in European sovereignty S&P SEVEREIGNS SECTOR. European level defense expenditures”.
One of the options officials are considering, some form of joint debt issuance, including the UK and Norway.
Other reports by Paola Tamma in Brussels