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The rate on German 10-year bonds rose two basis points to 2.43%, while defense stocks buoyed European indexes and the euro strengthened. The move helped boost global risk appetite, which has been on the rise since late Friday amid US equity gains and an advance for crypto over the weekend. US yields also rose.
The latest moves follow reports that Germany's probable next government is considering setting up two special funds for defense and infrastructure spending which could amount to hundreds of billions of euros, according to Reuters.
'It would be a fiscal regime shift of historic proportions,' said Robin Winkler, chief German economist at Deutsche Bank AG, in a client note. 'If reports over the weekend proved correct, the two funds would add up to a significant fiscal impulse.'
One pressure valve that is sensitive to changes in the supply of German debt — the bund swap spread — fell to a record low, reflecting the concern among investors who will be tasked with absorbing more sales.
'Defense spending looks like it will be both on a national level and on an EU level - but there is no doubt that defence spending will increase significantly,' said Jens Peter Sorenson, chief analyst at Danske Bank. 'There will be more issuance in the long end of the curve so investors want to have risk premium.'
The euro rose 0.3% against the dollar to $1.0403 as a gauge of the greenback pulled back from a two-week high. Germany's benchmark stock index rose as much as 0.9%, led by a surge in defense stocks and outperforming euro area peers.
'If Russia wins this war, there is no euro,' said Timothy Ash, senior EM sovereign strategist at RBC Bluebay Asset Management, on Bloomberg TV. 'This is an existential threat to the euro, it's like Covid, it's about our security and national defense. We need to find the money.'
The yield on US 10-year debt rose three basis points to 4.24% ahead of the publication of US ISM data for February.
--With assistance from Alice Atkins and Naomi Tajitsu.
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