Bund rout continues as traders digest German spending plans, ECB rate cut

By Stefano Rebaudo and Harry Robertson

March 6 (Reuters) - Benchmark Bund yields rose sharply again on Thursday after recording their biggest daily rise in more than 25 years the previous day, as Berlin's plans for a huge spending package led investors to expect a massive increase in German bond supply.

Yields moved higher still after the European Central Bank cut interest rates by 25 basis points (bps) to 2.5% as expected, but changed the wording in its statement, which some analysts took to mean another cut in April is not guaranteed.

Germany is in for a massive ramp-up in spending, with a 500 billion euro ($540.90 billion) special fund sought for infrastructure and plans to unshackle defence investment from restrictive borrowing rules.

"Additional spending could only start to filter through to the economy later this year and into 2026," said Mark Haefele, chief investment officer at UBS Global Wealth Management.

"But despite these caveats, the bold fiscal plan has the potential to boost growth and support euro zone assets," he added, mentioning a possible lift to confidence and an improving backdrop for equities.

Yields on 10-year Bunds DE10YT=RR were up 11 bps at 2.897%, after hitting 2.929% earlier in the session, their highest since October 2023.

They jumped more than 30 bps on Wednesday, recording the biggest daily rise since May 1997. Yields move inversely to prices.

Markets trimmed bets on further ECB rate cuts after the central bank said in its policy statement that "monetary policy is becoming meaningfully less restrictive", changing its previous guidance that rates remained restrictive.

The nuanced language suggests another rate cut in April is not a given, as policy hawks are already arguing for caution.

ECB President Christine Lagarde said the bank was watching German and European Commission spending rule changes closely.

"We have to be attentive and vigilant, and understand how this will work," she said. "On both accounts, that would be supportive to European growth at large."

TRADERS TRIM ECB BETS

Traders are pricing in an interest rate of around 2.13% in December EURESTECBM7X8=ICAP, from 1.92% late on Tuesday before the German fiscal announcement and around 2.06% before the ECB decision.

Germany's 2-year yield DE2YT=RR, more sensitive to ECB policy rates, rose relatively sharply after the rate decision and was last up 6 bps at 2.296%.

It jumped 22.5 bps on Wednesday, in its biggest daily rise since March 2023.

"That the ECB now sees interest rates as 'meaningfully less restrictive' was a strong hint that they could pause at the next meeting and thus we now see April as a 50/50 decision," said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.

"(It) will depend heavily on incoming data and whether President Trump's anticipated April 2 tariff announcements include significant measures targeting Europe."

Other euro area bond yields followed Bunds, leaving spreads roughly unchanged.

The yield gap between Italian and German bonds DE10IT10=RR - a market gauge of the risk premium investors ask for to hold Italian debt – stood at 106 bps, after briefly dropping below 100 bps for the first time since 2021 the day before.

($1 = 0.9244 euros)