German bond yield spiked higher Thursday, pulling global government bonds along with them and boosting U.S. equity markets, following a report that suggested the government is mulling a spending package that could ignite growth in Europe's biggest economy.
Reuters reported that a senior German government official has said lawmakers are looking at ditching the so-called "black zero" ambition of a balanced budget, an extremely popular stance in the country's domestic politics, in favor of fresh borrowing that could be used for a spending plan to tackle climate change. The official told Reuters that the country's fiscal ambition of no new debt sales is "no longer tenable" given the current climate challenges.
The report sent benchmark 10-year government bond yields, a proxy for risk-free borrowing in Europe, sharply higher, rising 4 basis points to -0.523%. The DAX performance index, the country's stock benchmark, hit a session high of 11,784.15 points after rising 1.18% following the report.
Indeed the German stimulus news was somehow lost in translation, while the CSU is reportedly asking for €500 *millions* in green spending, or 0.015% of German GDP.
The most interesting thing in all this is the market reaction, imo. https://t.co/5S6hERvUNv— Frederik Ducrozet (@fwred) August 8, 2019
U.S. 10-year Treasury bond yields were also affected, with yields rising to 1.77% following the report, while U.S. stocks, which have moved in reverse lockstep with bond yields for the past few sessions, showed a 110 point opening bell gain for the Dow Jones Industrial Average.
A change in Germany's fiscal stance could be extremely significant, given its influence on European growth and its role in the global export market. Germany's entire debt curve, from 2 month bills to 30-year bunds, currently trades with a negative yield, meaning the government could effectively borrow billions, and more, with little or no costs to the taxpayer.
Germany's economy is also slowing sharply, and data yesterday showed that industrial production fell at the steepest annual pace since 2009, a reading that led to a world-wide government bond rally that helped push U.S. Treasury note yields to the lowest levels since 2016.
The so-called yield curve, a term for the difference between interest rates of different maturities in the bond market, had "flattened" throughout the past six weeks as the U.S.-China trade dispute deepened and factory output in the world's biggest economies fell to the lowest level since 2012.
The flattening had investors fretting over an an inversion of the yield curve, a condition where 2-year yields rise above 10-year yields and which has signaled nearly every U.S. recession for the past 60 years.