Fear of German Debt Binge Flips Key Market Gauge for First Time

(Bloomberg) — The German 10-year yield rose above the equivalent swap rate for the first time on record as traders braced for the possibility of more bond sales next year under an administration that could be more tolerant of increasing debt.

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The spread between the two inverted on Thursday, tightening to minus two basis points, the lowest reading since Bloomberg started collecting the data in 2007. It comes after German Chancellor Olaf Scholz called for snap elections and sacked his Finance Minister Christian Lindner, who is opposed to relaxing rules that severely constrain government borrowing.

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The difference between bond yields and swap rates is an important gauge of future issuance because bonds tend to weaken relative to swaps as the market anticipates more sales. The move accelerates a long-term trend that has picked up pace across the world, reflecting investor fears over higher debt supply.

“The collapse of the German government looks set to add to the latest cheapening leg,” Commerzbank AG strategist Hauke Siemssen wrote in a note. “The way toward more debt will most likely become easier without a finance minister Lindner.”

The German yield curve steepened Thursday, another sign of fiscal concerns. The 30-year yield rose as much as 10 basis points to 2.75%, the highest since July, while the two-year was just four basis points higher at 2.22%.

German debt sales next year are already forecast to be a record. Citigroup Inc. strategist Puja Sawant expects net bond issuance will climb to €139 billion ($149.5 billion), a number exceeded only by France. The figure also reflects debt that will roll off the European Central Bank’s portfolio as it continues to shrink its holdings.

Scholz has argued Germany needs “more financial wiggle room” to deal with its challenges. Once Europe’s economic powerhouse, the country is now grappling with a lengthy retreat in its manufacturing sector, which faces higher energy costs and competition from markets including China. Donald Trump’s threat to impose new tariffs are likely to add to the headwinds.

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