European bond yields set to rise as US' Ukraine stance boosts military spend: BNP Paribas
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'We're beginning to get a steepening of the European yield curve,' said James McAlevey, the French bank's head of global aggregate and absolute return. This means that long-term yields are growing faster than short-term ones.
A week ago, US President Donald Trump ordered a 'pause' on aid to Ukraine to pressure Ukrainian President Volodymyr Zelensky to engage in negotiations to end the war. As the US withdraws its support, European countries have been reinforcing their commitments.
'European fixed-income investors are waking up to the idea that even within Europe, we're going to start getting more fiscal expenditure on defence, not less,' said McAlevey, 'We're not talking small numbers here.'
On March 1, the UK approved a £2.26 billion (US$2.9 billion) loan to Ukraine to enhance its defence capabilities. On Tuesday, the European Commission announced a plan to lend up to €150 billion (US$162.7 billion) to member states to help them boost military spending.
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Total 2024 defence expenditures by European Union member states were estimated at €326 billion, or about 1.9 per cent of the EU's gross domestic product. The proportion is expected to approach 3 per cent as they ramp up their spending.
The bond-yield curve started to steepen because the market was anticipating bond issuances as governments raise money to support the higher spending, McAlevey said.
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