German Government Bonds Rise on Weak Macroeconomic Data in Europe

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The German government bond market showed solid gains at the start of 2026 amid deteriorating macroeconomic signals and a reassessment of interest-rate expectations, reports Bloomberg. Weak retail sales data and slowing inflation have reinforced expectations of further easing by the European Central Bank. These factors have outweighed concerns related to the sharp increase in Germany’s borrowing needs.

Market Dynamics and Key Drivers

The yield on Germany’s 30-year government bonds fell to 3.42% in early January 2026 after reaching a 14-year high in December, reflecting a clear shift in sentiment across the sovereign debt market. Investor interest was also evident in the primary market, where demand for new 10-year bonds exceeded supply by 1.29 times, although this ratio was lower than at the previous auction. At the same time, the amount sold nearly doubled to €4.5 billion, or $5.3 billion, pointing to sustained demand for German government debt despite the increase in issuance.

The positive momentum was not confined to Germany. The buying wave extended to other European markets, including the UK. Weaker data from the construction sector and solid demand at an auction of five-year government bonds supported the British market, with the yield on 10-year bonds falling to 4.41%, marking the largest daily drop since November, while 30-year yields declined to their lowest levels since April.

Signals of slowing economic activity in Germany have been a key factor behind the current dynamics in the government bond market. Data came in below expectations for both retail sales and price trends, once again highlighting the vulnerability of the euro area’s largest economy. Against this backdrop, money markets revised their expectations for ECB policy, pushing the anticipated timing of the first rate hike to the start of next year.

Previously, investors had been positioning for monetary tightening, leading to a build-up of short positions. Mohit Kumar, chief economist and strategist at Jefferies International, noted that such positioning now appears excessive. According to Jefferies’ proprietary indices, the crowded nature of trades against German government bonds makes strategies favouring short-dated German paper more attractive than exposure to longer-dated US Treasuries.

Market sentiment has also been shaped by the behaviour of macroeconomic surprise indicators. Citi’s Economic Surprise Index for the euro area has fallen to its lowest level in more than a month, suggesting that investors may have overestimated the region’s growth prospects. Current market pricing reflects expectations of policy easing of around five basis points by September, equivalent to roughly a 20% probability of an additional quarter-point cut.

Fiscal Risks

A significant increase in government bond issuance in 2026 could potentially limit further declines in yields, particularly for longer-maturity securities. However, current market behaviour suggests that these risks have temporarily moved into the background, as investors remain focused on signs of economic weakness that are shaping expectations for a more accommodative monetary policy stance.

The political backdrop adds to the uncertainty. German Chancellor Friedrich Merz has previously described certain sectors of the economy as being in a “very critical” condition and stated that restoring growth will be the government’s top priority in 2026. As part of a long-term investment programme, Germany plans to substantially increase spending on infrastructure and the modernisation of its armed forces, implying a roughly 20% rise in federal borrowing to a record €512 billion.

Axel Botte, head of market strategy at Ostrum Asset Management, notes that markets have already largely priced in Germany’s fiscal impulse. In his view, the yield on 10-year German government bonds is likely to hover around 2.80% in 2026, limiting the scope for further declines, particularly at the long end of the curve.

Bloomberg macro strategist Ven Ram stresses that the current rally should be viewed in the context of a softer inflation backdrop in Germany and France. He argues that this has prompted profit-taking on short positions following the sharp rise in long-term yields over the past two months. At the same time, structural factors — including increased borrowing, weaker demand for long-dated bonds and a higher term premium — remain relevant over the medium term and continue to constrain the market’s upside.

Conclusion

At the start of 2026, Europe’s sovereign debt market is showing a rare degree of consensus: as long as economic signals remain weak, expectations of monetary easing continue to outweigh concerns over record borrowing levels. For investors, this implies heightened sensitivity to macroeconomic data and central bank communication in the months ahead.

The ECB expects the euro area economy to grow by around 1.2% in 2026 following weak performance in 2024–2025. Inflation is forecast to continue slowing and average about 2.0%, in line with the central bank’s target. The projections also point to weak domestic demand and persistent pressure from high interest rates, despite the anticipated easing of monetary conditions.

The International Monetary Fund notes that the outlook for the euro area economy in 2026 remains vulnerable to external shocks. Growth is assessed as moderate, while the balance of risks remains tilted to the downside due to geopolitical uncertainty, trade restrictions and weak productivity dynamics. The IMF also highlights limited fiscal space in several countries amid rising public debt.

Analysts at International Investment note that under these conditions, signals from regulators and new data on inflation and economic activity are likely to remain the key drivers for markets in the coming months, while the impact of expanding borrowing temporarily recedes into the background.