German elections scare investors: rates and government bonds rise on the eve of German vote

German Elections: The Impact on Bund and BTP Yields

Unlike France, where political uncertainty has often generated some volatility in the markets, the reaction on the German stock markets on the eve of the historic result of the German far-right party AfD in the regional elections in Thuringia and Saxony, it was quite contained. However, despite the apparently calm climate, several tensions have nevertheless emerged in the bond sector, with an increase in rates on European sovereign bonds. In particular, The yield on the 10-year German Bund rose to 2.34%followed by the French OaT at 3.05% and the Italian BTp at 3.78%, causing a slight increase in spreads.

While a change of government in Germany is unlikely in the immediate future, the possible consequences in the medium to long term cannot be ignored. Germany, despite having completed most of its bond issuance requirement for the year, will have to face new challenges regarding economic stability and public debt management from January. Investors are therefore concerned that the inclusion of elements of the AfD program in mainstream parties and the need for increasingly broad coalitions could complicate decisions on the budget and economic policies. This could also have significant repercussions on Germany’s ability to address problems such as deindustrialization and maintain its traditional restrictive fiscal policy, both nationally and at European level.