German 10-year Bond yields have spiked to 2.912%. That seems low to most countries, but for Germany these are the highest yields since 2023 when inflation was raging. Here is the chart:
The reason for this is that Germany's newly elected government unveiled a plan to borrow a staggering €500 bn to finance infrastructure spending and defence spending.
Germany's existing debt is only 61% of GDP, which is low compared to France (113% of GDP) and the USA (124% of GDP), so the borrowing won't destabalise the country. For example, even with this huge spending, the German budget deficit will only widen to 2.5% of GDP (compared to the USA which is running a budget deficit of 7% of GDP).
Further, because Germany has been in recession for two years because of the energy crisis, they need a big bazooka to restart it, and rebuilding Germany's tired infrastructure should do it. Defence spending is also needed given the looming threat from Russia, and as long as the money is spent on German made defence products, that should boost the economy too.
There are some constitutional barriers to this - the Bundestag needs to vote to lift the debt brake which limits Germany's structural deficit to 0.35% of GDP. And some opposition parties say they'll challenge this in the courts.
But if it goes through, this will be a major boost to the German economy.
But what about the spike in yields? Won't that make servicing debt expensive? Well 2.91% is not much to pay, and because the existing debt levels are low, the growth from the infrastructure should more than offset the cost of the debt.
