German long-term bond yields rise after cabinet approves draft budget
Germany's long-term government bond yields rose on Tuesday after the cabinet passed a draft budget for 2025 and framework for 2026 that include record investments in both years to stimulate growth in Europe's biggest economy.
Traders were also watching the Middle East, where Israeli Defence Minister Israel Katz said he had ordered a strike on Tehran in response to what he said were Iranian missiles fired in violation of a ceasefire announced hours earlier by U.S. President Donald Trump.
The ceasefire had raised hopes of an end to the 12-day war even as deadly attacks were reported in both countries.
But euro zone government bond yields, unlike most other asset classes on Tuesday, were largely focussed on the German news.
German 10-year yields extended earlier small gains and were last up nearly 5 basis points at 2.55%, while 30-year yields rose almost 8 bps to 3.059%, set for their biggest one-day increase since the beginning of May. They had earlier hit their highest level in nearly a month.
"It's all about the new (German) budget and the new supply of bonds coming into markets in the coming years," said Nabil Milali, portfolio manager at Edmond de Rothschild Asset Management, noting that the announced measures included larger investments than markets had anticipated and were to be implemented more quickly than expected.
The country's finance agency said earlier in the day that Germany planned to issue 19 billion euros ($22 billion) more in debt in the third quarter than initially expected.
It did not plan to issue a 50-year bond this year but the conditions have been created to do so in the future, it said.
Two-year Schatz yields, which are more sensitive to interest rates, were little changed at 1.85%, bringing the spread between 2-year and 10-year yields to its widest in a week at 69.60 bps.
"The reaction is stronger to the upside on long-end yields because the short-term bonds are also conditioned by the ECB's prospects of rate cutting," Milali said.
The European Central Bank can further cut interest rates at a time of huge volatility in energy markets, policymaker Francois Villeroy de Galhau told the Financial Times in an interview published on Tuesday.
Several ECB policymakers were set to speak on Tuesday, including President Christine Lagarde and chief economist Philip Lane later on.
Monday's survey of business activity showed the euro zone economy flat-lined for a second month in June, as the dominant services sector showed only small signs of improvement and manufacturing none at all.
For now, traders expect the ECB to deliver one more rate cut this year as inflation is nearing the central bank's target.
Tuesday's drop in oil prices following the ceasefire announcement helped preserve those expectations.
It brought losses over the past week to around 10%, which helped soothe investor concerns about a potential energy price shock compounding economic uncertainty linked to U.S. tariffs.
Meanwhile, Italian 10-year BTP yields were flat at 3.507%, leaving the premium over Bunds at 94.60 bps .
($1 = 0.8624 euros)
(Reporting by Amanda Cooper and Linda Pasquini. Editing by Bernadette Baum and Mark Potter)
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