(March 18): Pacific Investment Management Co is increasingly negative on the outlook for German government bonds as the country edges close to a crucial pivot toward more public spending.

Sachin Gupta, a fund manager at the firm, has added to an underweight position in bunds, pointing to Chancellor-elect Friedrich Merz’s efforts to unlock hundreds of billions of euros for investment in defense and infrastructure. The incoming leader last week won key political backing ahead of a vote on the package on Tuesday, which implies it will succeed.

“It is an important development,” said Gupta, a 27-year investing veteran who helps oversee more than US$43 billion (RM191.1 billion) in assets. “It is not just about this announcement, it’s also about the future possible fiscal action. Market believes, is assigning good probability that it gets passed.”

Pimco’s view echoes that of BlackRock Inc, which also recently went underweight euro-area fixed income on the outlook for greater bond sales in the region and limited scope for more interest-rate cuts.

German bonds sold off sharply this month on the nation’s decision to loosen its purse strings after years of fiscal conservatism, causing the yield on benchmark 10-year bonds to surge nearly 50 basis points to touch the highest levels since 2023. The rout spilled over to other euro-area countries, with rates on Italian, French and Spanish notes all spiking.

Pimco’s Gupta has also gone overall underweight European duration, which is market parlance for interest-rate risk. It remains unclear the extent to which other European nations will follow Germany’s lead in spending more, given already-burdensome debt piles.

The potential boost to the euro-area economy from increased defense spending has spurred traders to pare bets on interest-rate cuts from the European Central Bank. Swaps point to just under 50 basis points of further easing this year, taking the terminal rate to about 2%.

“We would agree with that,” Gupta said. “The ECB has time to look at how some of these announcements will affect the data and they may adjust because of that. But I think it’s way too premature to think about any sort of hikes.”

The yield on 10-year German notes fell six basis points on Monday to 2.82%. UBS Group AG strategists have recommended buying the bonds at around 2.90%.

Uploaded by Siow Chen Ming