Despite a sizable fiscal boost, Germany is not expected to experience rising term premium. The country's debt-to-GDP ratio remains low, and strong demand from the private sector and foreign investors is forecast to easily absorb the increased bond supply, containing upward pressure on yields.

While markets are excited about Germany's fiscal stimulus, its economic impact will be a drawn-out process. Implementation delays, lags in defense procurement, and potential capacity constraints mean the positive effects on growth will materialize over the medium term, not as an immediate boost.

The outlook for 2026 is significantly more optimistic than 2025, primarily due to fiscal policy. Deficit-financed tax cuts are expected to add nearly half a percentage point to GDP growth. This stimulus, not AI, is seen as the main force lifting the economy from below-potential to at-potential growth.

Many developed countries are approaching their fiscal limits, a state Bridgewater's Co-CIO frames as "we're all Brazil now." Unlike Germany, where fiscal spending boosts the economy, for countries like the UK, such actions become counterproductive—the currency falls and interest rates spike. The US is drifting toward this line, losing its policy flexibility.

Beyond broad fiscal stimulus, Germany's increased defense spending is a specific, measurable catalyst for its manufacturing recovery. This is directly visible in industrial orders reports and cited by companies in PMI surveys as a reason for accelerating output.

In a model where government spending injects new money into the system, government debt is intrinsically linked to GDP growth. The idea that this debt can grow unsustainably faster than the economy is flawed, as the debt itself is a mechanism for that economic growth.

In a world where the government is the largest debtor, raising interest rates acts as a fiscal transfer, increasing income for the private sector (bondholders). When this is financed through monetized bill issuance, higher rates can paradoxically become an economic stimulus, not a contractionary force.

While gross Euro area sovereign bond issuance is set for a new record in 2026, this is primarily driven by Germany. Net issuance for the region will remain similar to 2025 levels, as deficits in other countries are flat or declining, mitigating overall supply pressure.

Despite Germany's fiscal expansion driving record Euro area gross issuance, the resulting €60 billion increase in German bonds is considered insignificant for a triple-A issuer. Analysts argue this amount is easily digestible and does not warrant concerns about rising term premium, especially when compared to the scale of U.S. Treasury issuance.