European Bonds Slip, Defense Stocks Rise Amid Geopolitical Tensions

European government bonds declined while shares in defense companies rallied on Monday due to the likelihood of increased military spending. This spending could lead to increased borrowing by governments in the coming years.

Bond Market

Prices for German, French, and Italian bonds fell, with 10-year bund yields reaching their highest levels in over two weeks. The bond pullback slowed throughout the day.

Stock Market

Europe's Stoxx 600 index extended gains to rise by 0.5%. Goldman Sachs' index of European defense shares reached a record high. German defense firm Rheinmetall AG climbed by 11.3%, contributing to the rise of the Frankfurt bourse to a new peak.

Geopolitical Developments

The market movements were triggered by the US request for European nations to provide security guarantees and military aid to Ukraine. European officials are working on a significant package to increase defense spending. Some EU leaders met in Paris to discuss their response.

Market Outlook

Analysts expect increased defense spending to necessitate a rise in debt issuance by European nations. Bloomberg Economics estimates that upgrading defense and supporting Ukraine could cost Europe's major powers an additional $3.1 trillion over 10 years. This has led to cautious sentiment in the bond market.

Other Market Highlights

European stocks also benefited from improved sentiment in China, a major export market. The Japanese yen strengthened against other G-10 currencies after the country's economy grew faster than expected, raising expectations of interest rate hikes by the Bank of Japan.