European Bonds Slide On Defense Spending Concerns: Markets Wrap

European bonds extended declines on concern governments will need to ratchet up debt sales to fund a bigger military as the US and Russia meet to negotiate an end to the war in Ukraine.

The yield on German 10-year bunds rose two basis points while Europe’s Stoxx 600 index posted small moves. In the UK, the pound pared losses after data showed weekly wages grew faster-than-expected last quarter, potentially muddying the case for further monetary easing from the Bank of England.

The war in Ukraine is dominating markets in Europe as traders await details on new defense funding measures and officials fume after being excluded from the talks between top US and Russian officials in Saudi Arabia. Defense shares soared on Monday on expectations of increased spending. New measures are due to be presented in time for an upcoming March 20-21 summit, according to Polish Prime Minister Donald Tusk.

“Support for more defense spending is growing in Europe as the US takes a step back,” ING Groep NV strategists Michiel Tukker and Benjamin Schroeder wrote. “Joint EU borrowing could be a way forward and the latest on German politics will therefore be watched closely, with long-end Bund yields already nudging higher.”

Trading resumed in the US after public holidays, with Treasury yields climbing and the dollar advancing against Group-of-10 peers. Federal Reserve Governor Christopher Waller said recent economic data supported keeping interest rates on hold until more progress was seen in inflation. Stock futures pointed to gains at the Wall Street open as contracts on the S&P 500 rose 0.3%.