(Bloomberg) — European bonds fell and shares in defense companies rallied on the likelihood of greater military spending, which could force governments to step up borrowing in the coming years.
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German, French and Italian bonds all declined, with 10-year bund yields — the benchmark borrowing rate for the euro area — reaching the highest in more than two weeks. Europe’s Stoxx 600 index rose 0.2%, led by defense names, with Germany’s Rheinmetall AG jumping 6%. A Goldman Sachs Group Inc. index of European defense shares topped a record high. US markets are shut for a holiday.
Officials are working on a major new package to ramp up defense spending and some EU leaders are planning to meet on Monday in Paris to start drawing up their response. The moves come as the US pushes for a quick end to the war in Ukraine and Vice President JD Vance attacked longstanding European allies at a security conference Friday.
“The goalposts are shifting, and the EU is realizing they can rely less and less on the US for protecting its borders. In lockstep, we’re going to have to see European countries spend more on defense,” said Aneeka Gupta, head of macro research at Wisdomtree UK Ltd. “That does warrant a bit more caution on bonds.”
The developments have cemented the view that debt sales will need to increase as European nations shoulder the cost of a lasting peace deal between Ukraine and Russia. Upgrading defense and protecting Ukraine may cost Europe’s major powers an additional $3.1 trillion over 10 years, according to Bloomberg Economics estimates.
European stocks are also buoyed by greater optimism over China, a key export market. Investors have been piling into technology shares, especially in China, amid optimism over DeepSeek’s AI app. Monday’s meeting between President Xi Jinping and business figures including e-commerce icon Jack Ma was also seen as a catalyst for gains.
Goldman Sachs Group Inc. strategists raised their MSCI China index target on optimism over the country’s technological advancements. A gauge of Asian shares rose 0.4%, after earlier reaching the highest level since November.
In currency markets, Japan’s yen strengthened against all its Group-of-10 peers after better-than-expected gross-domestic-product data bolstered expectations of interest-rate hikes from the Bank of Japan. Bloomberg’s dollar index traded steady after two days of losses.
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