(Bloomberg) — European bonds slipped and shares in defense companies rallied on the likelihood of greater military spending, which could force governments to step up borrowing in the coming years.
Most Read from Bloomberg
Prices for German, French and Italian bonds all declined, with 10-year bund yields — the benchmark borrowing rate for the euro area — reaching the highest in more than two weeks. While the bond pullback slowed, Europe’s Stoxx 600 index extended gains to rise 0.5%, and a Goldman Sachs Group Inc. index of European defense shares topped a record high.
German defense firm Rheinmetall AG climbed as much as 11.3%, helping lift the Frankfurt bourse to a new peak. US markets are shut for a holiday.
The moves came as the US asked European nations to spell out what security guarantees and equipment they can offer Ukraine to ensure a lasting peace settlement. European officials say they are working on a major package to ramp up defense spending and some EU leaders are meeting in Paris to draw up their response.
“The goalposts are shifting, and the EU is realizing they can rely less and less on the US for protecting their borders. In lockstep, we’re going to have to see European countries spend more on defense,” said Aneeka Gupta, head of macro research at Wisdomtree UK Ltd. “That does warrant a bit more caution on bonds.”
The developments have cemented the view that debt sales will need to increase as European nations shoulder the cost of a lasting peace deal between Ukraine and Russia. Upgrading defense and protecting Ukraine may cost Europe’s major powers an additional $3.1 trillion over 10 years, according to Bloomberg Economics estimates.
France’s minister for European affairs, Benjamin Haddad, told Bloomberg TV ahead of the Paris meeting that joint EU bonds could be issued to fund defense, an option that’s so far divided the bloc.
Meanwhile, European stocks are also getting a boost from China, a key export market. A meeting between President Xi Jinping and business figures including Alibaba Group Holding Ltd. co-founder Jack Ma raised hopes that a years-long crackdown on the private sector is ending.
In currency markets, Japan’s yen strengthened against all its Group-of-10 peers after the economy grew faster than expected, bolstering expectations of interest-rate hikes from the Bank of Japan.
