Investing.com -- German bonds are experiencing their most challenging day since the period after the fall of the Berlin Wall. This is due to a historic spending plan set to unlock hundreds of billions of euros for defense and infrastructure investments, causing a stir in European markets.

The yield on Germany’s 10-year bonds was on track for its largest increase since March 1990, up 29 basis points. This comes after Friedrich Merz, the incoming chancellor, detailed a comprehensive fiscal revamp late on Tuesday. The previous time the nation’s benchmark bond yields rose this significantly, West Germany and East Germany were on the brink of reunification as the Soviet Union was collapsing.

Many investors have been advocating for Germany to relax its fiscal restrictions, suggesting that these hinder national growth. Even before Merz’s election win, money managers were sensing a shift in Germany’s long-held reluctance to spend. This perception now appears accurate, with a significant change in Germany’s stringent controls on government borrowing in response to US President Donald Trump’s desire for a swift resolution to the conflict in Ukraine. This has led European leaders to rapidly mobilize additional defense funds to counter the threat posed by Russia.

The expectation that this plan will invigorate the European economy has put the euro on track for its best three-day performance since 2015 and has also bolstered European stocks.

The yield on 10-year German notes hit 2.78%, a level not seen since November 2023, and rates increased across the continent. In France, Italy, and Spain, they rose more than 20 basis points. The euro gained over 1% to trade above $1.07 for the first time in four months.

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