Currently, Germany and other countries in the Eurozone are issuing bonds at a record scale, driving up European bond yields. The main reason is that European countries have been borrowing heavily to meet their fiscal needs following a series of crises such as the COVID-19 pandemic, the Russia-Ukraine conflict, and tensions with Iran.
On August 18, the 30-year German government bond yield hit 3.783%, reaching a new high since 2011. The order book size exceeded 38 billion euros, with actual issuance of about 4 billion euros. Market participants believe that concerns about inflation triggered by the Iran conflict have further intensified the selloff.
In addition to Germany, the 30-year government bond yields of other European countries are also at high levels, such as the Netherlands (around 3.776%), Austria (around 4.027%), Spain (around 4.405%), Italy (around 4.864%), Belgium (around 4.678%), and the UK (around 5.796%).
However, demand for the 10-year German government bonds issued on August 19 was weak, with only 38 billion euros (about 44.5 billion US dollars) sold, lower than the previous expectation of 60 billion euros (about 70 billion US dollars).
Furthermore, the Eurozone benchmark issuer (Germany) also issued 30-year government bonds the day before, with the yield hitting a new high in 15 years.
As bond prices and yields have an inverse relationship, an increase in yields means higher borrowing costs for the government, which could potentially raise mortgage and corporate borrowing costs, putting pressure on economic growth.
Commerzbank estimates that the total supply of German government bonds will reach a record 4 trillion euros by 2027, higher than this year’s 3.49 trillion euros.
Ales Koutny, International Rates Manager at Vanguard managing approximately $12 trillion in assets, told Reuters: “The current situation is that the bond market needs to raise a large amount of funds, and yields are adjusting to reflect that.”
Benjamin Schroeder, Senior Interest Rate Strategist at ING, stated, “Bond supply is picking up after the summer.” He added that Germany’s announcement of issuing 30-year government bonds earlier than many market participants had expected “puts some upward pressure on yields.”
European governments continue to issue bonds in large amounts to support welfare and healthcare spending due to aging populations, increase defense spending in response to geopolitical risks, and address increasingly extreme climate change.
Barclays, headquartered in London, estimated in July that the total supply of Eurozone bonds next year will reach a new record of 1.54 trillion euros, but spending remains highly uncertain. The bank also pointed out that considering investors typically reinvest maturing debt into bonds, the net supply is expected to be around 574 billion euros, slightly lower than 2026 levels.
Barclays stated that France will be closely watched as political figures struggle to reach consensus on budget measures, with the fiscal deficit expected to remain above 5%.
In addition, the 30-year French government bond yields recently approached their highest levels since 2008, at around 4.86% to 4.90%.
The European Central Bank is currently reducing its balance sheet, allowing held bonds to mature without reinvestment, which means private investors must absorb more debt.
Michael Weidner, Co-Head of Global Fixed Income at Lazard Asset Management, said that with government and corporate bond issuances on the rise, investors have already reacted; if bond supply increases but demand lags, there will be a need to “offer better prices.”
Weidner explained, “We have already purchased 10-year bonds but are cautious about buying ultra-long-term bonds.” He added that German 10-year government bond yields around 3.27% are quite attractive.
Aside from Germany and France, the approximate 10-year government bond yields of other major European countries are as follows: the Netherlands around 3.33%, Austria around 3.45%, Spain around 3.68%, Italy around 4.06%, Belgium around 3.80%, and the UK around 5.06%.
Overall, the core countries (Germany, the Netherlands, Austria) have relatively lower yields, while the peripheral countries (France, Italy, Spain) have significantly higher ones, reflecting differences in fiscal risk premia.