German 10s/30s curve steepens to fresh 7-year peak after Japan vote

By Stefano Rebaudo

Feb 9 (Reuters) - The gap between 10 and 30-year German yields hit a fresh seven-year high on Monday, driven by investor concerns over fiscal trajectories and the potential crowding-out effect on euro-area bonds from rising Japanese yields.

Japanese government bond yields were flat to higher along the curve after Prime Minister Sanae Takaichi's coalition secured a historic election victory on Sunday, paving the way for promised tax cuts and increased military spending aimed at countering China.

And while there was no repeat of October's bond market revolt when Takiachi won the leadership of Japan's ruling Liberal Democratic Party, Japanese yields are already higher than many European ones once FX risk is hedged out, and could rise further, analysts say, if worries about Japan's deficit build further.

"For a Japanese investor, it would make sense to focus on the domestic bond market instead of buying U.S. Treasuries or (German) Bunds," Mohit Kumar, economist at Jefferies, said.

"Hence, we should see some crowding-out effect, not just for sovereign yields but also spread products," he added, arguing that expansionary fiscal policies support Jefferies' view of staying away from the long end of the curve globally and favouring steepeners.

The yield curve steepens when long-dated yields rise relative to short-dated ones.

Germany's 30-year government bond yield DE30YT=RR - more sensitive to long-term fiscal concerns - rose to as much as 3.545% and was last up 2 basis points at 3.53%.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, was flat at 2.84%, after hitting 2.813% on Friday, its lowest point since January 19.

That left the gap between German 30-year and 10-year yields DE10DE30=RR at 69 bps, its highest since 2018. The gap has been steadily rising, both in Germany and in most markets around the world, as investors fret about higher government spending and borrowing.

Also in the mix for European investors, the Sentix index measuring investor morale in the euro zone rose unexpectedly in February, its third consecutive monthly gain and its highest level since July 2025, a survey showed on Monday.

US DATA IN FOCUS

It is not just Japan that could affect European borrowing costs. This week will be busy for U.S. data, since a brief U.S. government shutdown delayed the January employment report, and those numbers will be released alongside figures covering consumer prices and retail sales.

The figures could alter market pricing for the Federal Reserve's upcoming meetings, though the central bank will receive another round of data before its gathering on March 17 to 18.

British 10 and 30-year government bond yields rose as much as 8 bps in afternoon trading as Prime Minister Keir Starmer faced mounting pressure, though they walked back some of that move after some possible rivals to Starmer threw their support behind him, and were last up around 2 bps. GB10YT=RR, GB30YT=RR GB/

German 2-year bond yields DE2YT=RR, which are more sensitive to expectations for policy rates, were down 1 bp at 2.06%. They touched 2.046% on Friday, their lowest point since December 3.

ECB policymaker Gediminas Šimkus reiterated the central bank was equally likely to raise or cut interest rates, but it is hard to know when any such move will take place given the prevailing uncertainty about trade and geopolitics.

Italy’s 10-year government bond yields IT10YT=RR were down nearly 2 bps at 3.48%. The gap versus Bunds was at 60 bps after tightening to 53.50 bps in mid-January, its lowest level since August 2008.

Investors expect little chance of significant further tightening in euro area yield spreads without progress on financial integration.

Morgan Stanley sees greater risks for spread‑compression trades in the second half of the year, ahead of elections in several countries and due to the crowding‑out effect from AI‑related corporate issuance, which could weigh on the euro area government bond market.