LONDON - Germany's 10-year Bund yield rose on Monday to its highest level since late February, as the focus turned to prospects for greater fiscal spending after the Green Party announced its candidate for chancellor in a Sept. 26 federal election.
It is the first time in its 40-year history that the left-leaning Green Party has proposed a candidate - party co-leader Annalena Baerbock - for the top job in German politics.
Although she still only has an outside chance, the move underscores how the party has grown into a formidable force that is now just a few points behind Chancellor Angela Merkel's conservatives, who have ruled for 16 years.
While moves in the bond market were modest ahead of Thursday's meeting of the European Central Bank, Baerbock's candidacy will focus attention on possible economic reforms in Germany, given her pledges for a "new start" and greater investment in education, digital and green technologies.
"At the least they (the Greens) could be part of the ruling coalition and could push for more of a fiscal boost," said Antoine Bouvet, senior rates strategist at ING.
"It's not a surprise that the Greens are riding high in the polls but today's news has put them in the spotlight."
The 10-year Bund yield had traded flat for much of the session, but started to edge higher after the Green Party news, rising to its highest level in just over seven weeks at -0.225%.
Upcoming supply this week and an increase in U.S. Treasury yields also help explain the rise in euro zone debt yields.
Italy's 10-year yield was last up 3 bps at 0.73%.
New supply is estimated at over 30 billion euros ($36 billion) this week, above the average for the year so far according to Commerzbank.
However, significant moves are unlikely before the ECB meeting. The bank has stepped up the pace of bond-buying in its Pandemic Emergency Purchase Programme since its March meeting to contain a rise in borrowing costs that could derail the recovery.
Latest bond-buying data are released later on Monday.
Bond markets have been attuned to signs of disagreement within the ECB over the future pace of bond purchases.
Stefan Legge, an economist at the University of St Gallen in Switzerland, said he would pay attention to what the ECB says about anchoring long-term inflation expectations.
"Right now, the ECB is highlighting that inflation in 2021 is higher because of one-time factors," he said.
"I'll be watching what (policymakers) say about inflation and inflation expectations going forward as recent statements suggest they are willing to be more tolerant of higher inflation."
(Reporting by Dhara Ranasinghe Editing by Raissa Kasolowsky, Kirsten Donovan and Gareth Jones) ((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))