Germany's 10-year Bund yield has subtly risen to 2.89%, marking the highest level since March 2025, following the European Central Bank's (ECB) decision to maintain interest rates for the fourth successive meeting. This decision reinforces the prevailing view that there is no immediate need for policy adjustments. The new forecasts from the ECB suggest stronger economic growth with inflation projected to return to the 2% target by 2028, despite anticipated shortfalls in the next two years. Although many officials consider the current dip in inflation temporary, financial markets have begun to dismiss the possibility of further easing and entertain the possibility of an initial ECB rate hike as soon as 2026. Contributing to the upward pressure on yields, there is growing investor concern regarding Germany's fiscal sustainability. Notably, in November, German lawmakers approved the 2026 federal budget, deviating from the traditional "black zero" balanced-budget approach. The government is slated to issue a record €512 billion in bonds next year to support infrastructure enhancements and military expenditures.
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