Vontobel: European bond markets likely to shrug off German election result

September 20, 2021

By Ludovic Colin, Senior Portfolio Manager, Vontobel 

The coalition game in Germany looks more and more like a game of musical chair, so any form of prediction seems tricky at the moment.

People tend to forget that the number of seats in the Bundestag is variable: depending on the results, the number of seats could go up to 900 (compared to 706) today. The latest estimates expect 759 total seats with the SPD becoming the largest group in the parliament. In terms of coalition options, a grand coalition (SPD/CDU/CSU) remains possible but would only get a very slim majority. More likely, the coalition will have 3 or more parties increasing the number of possible combinations.

If the CDU/CSU are part of a grand coalition, there won’t be a massive change of fiscal policy in Germany or the EU. The only difference could be that the CDU/CSU won't be able to go back to strict fiscal orthodoxy in Germany as quickly as they would have hoped. If the SPD ends up calling the shots, there is likely to be a radical change of view in terms of fiscal deficit, European integration and green economy reforms. It is hard to see such a radical change happening though, and the outcome will be somewhere in the middle.

Bunds to remain steadfast but increase in fiscal expenditures could move all the yield curves in the EU

Even in the unlikely event that Germany decides to change fiscal tack, the country remains in much better shape than France, for example. There is no alternative as a safe haven in European government bonds at this stage. Therefore, there won't be a massive move in Bund yields compared to its neighbours. However, an increase in fiscal expenditure is likely to have a marked impact on the whole block by moving all the yield curves and triggering a “reflation” expectation movement in Europe. The ECB would be quite happy with that, as its inflation targets would be reached more quickly, removing the need for QE for example.

European government bonds unattractive

European government bonds look less attractive right now as growth in Europe is set to outperform the rest of the world by year end, triggering a shift at ECB who is likely to adopt a more relaxed stance and let yields go up. The results of German elections will not alter that course and so there won't be any lasting effects on fixed income markets.

German-French relations depend on re-election of Emmanuel Macron next year

Should the German government pivot to the left, Macron’s views on a strong independent Europe with more budget integration could receive more support leading to a strong convergence of views, and an acceleration of European convergence construction. However, nothing will change, regardless of the composition of the new German government, before Macron wins a second mandate next year.

This is the personal opinion of the author and does not necessarily reflect the opinion of Vontobel Asset Management.