Global Rates: Where next for European rate markets?

• A deal on the German fiscal package has been reached and is expected to be voted through in Parliament next week, leading to higher defense spending and revised growth forecast expectations.
• The massive sell-off in bund yields following the announcement can be attributed to higher ECB policy rate expectations, increased defense spending across the region, and term premium pricing.
• The revision of ECB terminal rate expectations and steepening of the money market forwards have put upward pressure on German yields, but the term premium may gradually fade, leading to a lower yield target of around 240-250 basis points by mid to late this year.

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