Hidden Messages Behind the Sell-Off of Eurozone Government Bonds

Over the past 24 hours, European bonds have experienced a severe sell-off in the markets, with even the AAA-rated German 10-year bond nearing an unprecedented 3%. What is truly happening? Initial interpretations point to decisions by Germany’s CSU and SPD parties regarding massive increases in European defense spending, funded through new debt. This has led to a significant rise in bond yields, increasing borrowing costs across Europe. While this explanation seems plausible, is it the sole factor? Recent developments suggest another critical reason: the $240-260 billion in loans provided by European countries and the U.S. to Ukraine. Unlike U.S. loans, which are secured by Ukrainian exports and rare earth materials, EU loans lack such guarantees, leaving European creditors exposed. With the ECB set to withdraw support programs like APP, PEPP, and TLTROs by January 1, 2025, the absence of U.S. involvement in financing the war could leave the Eurozone struggling to cover these debts, prompting market uncertainty and demanding higher interest rates from European borrowers.