The recent selloff in German bunds has been driven by two factors. First, Grexit risks have abated. Second, and more importantly, euro area growth continues to surprise on the upside.
The IMF reckons that the lagged effect of a weaker euro alone should boost real GDP by a cumulative 1.7 percentage points by early next year, with lower oil prices contributing another 0.3 points. In addition, we estimate that increased government spending could boost growth by a further 0.3 points this year, while the shift from negative to modestly positive credit growth could add a full percentage point.
This is a lot of extra growth in a very short period of time, and so it is not surprising that investors have begun to reconsider their view that the ECB will keep rates on hold for many years to come. However, while the euro area economy is likely to fare well over the coming few quarters, the party will not last far into 2016. Please see the next Insight, (Part II) The Spike In German Bunds Will Not Last.