German borrowing prices soar as Merz strikes to ease debt brake

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German borrowing costs surged on Wednesday after chancellor-to-be Friedrich Merz agreed a historic deal with his probable coalition partners that would relax the country’s strict “debt brake” rules to fund investment in the country’s military and infrastructure.

The yield on the 10-year Bund surged 0.18 percentage points to 2.66 per cent, its biggest one-day move since 2020, as investors braced for extra borrowing from the government.

Merz said late on Tuesday that his party and the rival Social Democrats (SPD) would jointly present a bill next week to relax the country’s strict borrowing rules.

“This fiscal sea change will permanently alter the way that bunds are trading,” said Tomasz Wieladek, chief European economist at asset manager T Rowe Price.

He added that the steep rise in yields “will raise the financing costs for all other sovereigns in the euro area significantly”.

Investors regard Germany’s debt as the benchmark risk-free asset for the entire eurozone but its bonds have historically been in short supply because of its reluctance to borrow heavily.

France’s 10-year government bond yields were dragged higher, with the yield up 0.13 percentage points to 3.36 per cent.

Germany’s stock market also opened higher, with the benchmark Dax climbing 2.6 per cent in early trading.

Asian stock markets earlier rebounded after comments from US commerce secretary Howard Lutnick that implied tariffs could be lowered on America’s neighbours.

Futures contracts tracking the US S&P 500 index and Nasdaq 100 were up 0.6 per cent and 0.7 per cent respectively. The dollar slipped 0.4 per cent against a basket of six currencies including the euro and pound.

Lutnick’s comments came after US President Donald Trump on Tuesday hit imports from Canada and Mexico with a 25 per cent tariff and imposed an additional 10 per cent tariff on Chinese imports, on top of a 10 per cent levy set last month.

In his first major policy address to Congress, Trump said that tariffs would cause “a little disturbance”.

Chinese markets were buoyant after the government released its annual “work report” and maintained an economic growth target of “around 5 per cent”. Hong Kong’s Hang Seng index rose 2.8 per cent, while the mainland’s CSI 300 index advanced 0.5 per cent.

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