The German election will bring higher Bund yields
The German election is becoming more uncertain. Recent polls show that the SPD has overtaken the CDU for the first time in 15 years, polling at 23%, just a point over Angela Merkel's party. Additionally, the Green party is in third place with 18%, indicating that an SPD-CDU/CSU-Green coalition is likely.
It's impossible to draw conclusions yet as anything is possible in the next five weeks. Yet, amid a SPD-CDU/CSU-Green coalition, we believe that Bund yields will rise.
Firstly, fiscal spending will increase. The SPD wants to propose an "obligation to invest", setting a minimum percentage of the budget for investments in schools, research, transportation and energy. At the same time, the Green party is looking to relax Germany's debt brake.
Secondly, all parties, including the FDP, seek a better European integration and are open to give the European Parliament the right to initiate legislation. Although there is a divergence of views over the EU coronavirus recovery fund, it's becoming clear that the issuance of common liability bonds is here to stay despite who's winning the elections.
The two points above reinforce our idea that German Bund yields are meant to rise with the German election. Also, a new government has the potential to accentuate spread compression among various European sovereigns during the last quarter of the year.