German yields, euro and stocks jump after deal to loosen German debt brake

March 5 (Reuters) – German long-dated bonds suffered their worst selloff in years and the euro jumped to its highest level in almost four months after the German conservatives and the Social Democrats (SPD) agreed to seek a loosening of Germany’s debt brake.

European shares bounced back on Wednesday after their worst day in more than six months.

Germany aims to allow higher defence spending and propose the creation of a 500 billion euro infrastructure fund, their leaders said on Tuesday.

“‘Don’t underestimate Germany’s capacity to change’ was our hypothesis into the year and just as most people gave up on Europe,” said Maximillian Uleer, strategist at Deutsche Bank.

“Today, Germany announced a ‘whatever it takes’ plan,”, he argued, adding: “Is Make Europe Great Again (MEGA) the new MAGA?”

Germany’s 10-year yield, the euro area’s benchmark, climbed 19 basis points (bps) to 2.67%, in its biggest daily rise since mid-March 2020, at the height of the pandemic crisis.

Germany’s 30-year yield was up 16 bps after rising almost 25 bps to 3.07% in its biggest daily jump since October 1998.

“Higher spending is likely to weigh on the longer end of the curve. We thus close our long duration call on Bunds,” Deutsche Bank’s Uleer added.

Money markets reduced their bets on European Central Bank rate cuts, pricing in a depo rate of 2% in December from 1.92% late Tuesday.

Germany’s 2-year yield, more sensitive to ECB policy rates, rose 13.5 bps to 2.15%.

“This proposal (to loosen the debt brake) could ultimately mean even more new debt than the earlier media reports about a combined 900 billion euros package for defence and investment,” said Christoph Rieger, rate strategist at Commerzbank, arguing that “the military component is in principle unlimited.”

“Moreover, the measures could also give the future governments more fiscal space beyond military and investment in the upcoming budgets,” he added.

The spread between the risk-free 10-year overnight index swap (OIS) and Bund yields dropped to -23 bps, its lowest level since August 2010.

The single currency jumped as investors eyed the prospective increases in fiscal spending, which could boost the economy.

The euro was up 0.5% at $1.068, its highest since November 11, jumping by almost 3% since Monday.

The single currency’s rise against the yen was more moderate, climbing 0.13% at 159.40.

“The euro/dollar broke decisively higher on prospects of a fiscal bazooka out of Europe. The speed with which the Europeans are moving is impressive, especially in Germany,” said Chris Turner, forex strategist at ING.

“Expect much focus now on whether the agreed fiscal changes in Germany move swiftly and easily through parliament over coming weeks,” he added. (Reporting by Stefano Rebaudo; Editing by Toby Chopra)