February 26, 2020 / 12:27 PM / a month ago

German bond yields jump after reports of softening of constitutional debt brake

LONDON, Feb 26 (Reuters) - German government bond yields rose on Wednesday after reports that Germany’s finance minister plans to temporarily suspend the country’s debt brake to give relief to local governments.

Finance Minister Olaf Scholz plans to modify the debt brake provision in the German constitution so that the federal government can assume some of the obligations of heavily indebted municipalities, Die Zeit newspaper reported.

The debt relief plan, proposed by the finance ministry some months ago, would see the federal government assume some of the debts already built up by the municipalities. Currently, however, the constitution sets strict limits on debt accumulation by the government.

Germany’s 10-year yield rose as much as 4 basis points on the day to -0.47%, bouncing off 4-1/2 month lows hit in earlier trade on fears of the impact of coronavirus. It was last up 2 bps at -0.49%.

“This is more likely to be a short-lived move and the overall risk off environment should prevail,” said Christian Lenk, rates strategist at DZ Bank, citing past reactions to similar news.

“I don’t think it will be a major game changer, not only is there a big budget surplus; there is a lot of spare capacity for easing so I don’t think it will lead to major changes in Germany’s funding plans.” (Reporting by the London Markets Team; writing by Yoruk Bahceli; Editing by Dhara Ranasinghe)

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