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 election-year fiscal stimulus may boost 2026 growth, it sets the stage for a potential inflation problem in 2027. The combination of lagged effects from the stimulus, tariffs, and restrictive immigration could cause overheating. Due to policy lags, the consequences won't be fully felt until after the election year.

Massive investment requires issuing assets (bonds, equity), creating supply pressure that pushes prices down. The resulting spending stimulates the real economy, but this happens with a lag. Investors are in the painful phase where supply is high but growth benefits haven't yet materialized.

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.

The "One Big Beautiful Bill Act" front-loads tax cuts, boosting consumer income and GDP in 2026. However, its spending cuts are delayed until later in the decade, meaning the bill will become a drag on economic growth in subsequent years as those austerity measures take effect.

Facing deep economic stagnation, German Chancellor Friedrich Merz’s coalition has outsourced key reforms to commissions. This strategy allows them to publicly acknowledge problems like pension and welfare system unsustainability while deferring politically difficult decisions, revealing a lack of consensus for immediate, disruptive change.

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.

While the upcoming 2026 German/EU fiscal stimulus is expected to boost industrial demand, the benefits won't materialize immediately. The key investment strategy is identifying companies with the cash flow and balance sheet strength to survive the interim period before the stimulus-led recovery begins.