European Defense Spending Lifts Stocks, Bond Yields

European bond yields rose, while defense stocks rallied, amid expectations of increased military spending, which could prompt governments to boost borrowing in the coming years, Sujita Rao reported for Bloomberg News.

Shares of Germany’s Rheinmetall AG jumped 8.9%. I Photo: Rheinmetall

Bonds from Germany, France, and Italy all declined, with Germany’s 10-year bund yields—a key benchmark for Eurozone borrowing costs—reaching their highest levels in over two weeks.

Meanwhile, European stocks saw a 0.3% gain, led by defense-sector shares, with Germany’s Rheinmetall AG jumping 8.9%. A Goldman Sachs index tracking European defense stocks hit a record high.

With US markets closed for a holiday, European officials are preparing a major new package to boost defense spending, and several EU leaders are expected to meet in Paris to coordinate their response.

According to Bloomberg Economics estimates, upgrading European defense capabilities and ensuring Ukraine’s security could cost Europe’s major economies an additional $3.1 trillion over the next 10 years.

The shift in defense strategy follows increased pressure from the US, where Vice President JD Vance recently criticized Europe’s reliance on American military protection at a security conference last Friday.

“The goalposts are shifting, and the EU is coming to terms with the reality that they can no longer rely as much on the US for border security,” said Aneeka Gupta, head of macro research at Wisdomtree UK Ltd. 

“As a result, European nations will have to boost defense spending, and that raises caution for bond markets.”

The expectation that European countries will need to increase debt issuance to finance long-term defense commitments has reinforced the view that government borrowing will rise in the coming years.