Asset management giant BlackRock has increased its short positions on German government bonds, betting on "significantly higher inflation" in Europe, which could push borrowing costs above the 15-year highs reached last week. Tom Becker, co-portfolio manager of BlackRock’s $6.5 billion Tactical Opportunities Fund, expects European governments to ramp up fiscal spending to help households cope with rising energy prices while also boosting military capabilities. Since the outbreak of the Middle East conflict one month ago, this outlook has led him to expand short positions in German 5-year and 10-year bonds, building on an existing short position in 30-year German debt.
Becker stated in an interview that markets may be underestimating the scale of fiscal responses from European policymakers, including increased winter energy security spending and investments in military readiness. He believes this will lead to higher bond supply in the coming quarters. As investors begin to demand higher term premiums for long-term debt, Becker expects the yield on Germany’s 10-year bond to surpass the recent peak of 3.13% seen last week, when Middle East tensions and surging oil prices intensified inflation fears.
Earlier this week, the yield dipped amid hopes of a ceasefire in the region, but it climbed back to around 3% by Thursday. Becker added that, with inflation remaining above target and fiscal expansion increasing bond issuance, a 3% yield “is not a high nominal rate.”
Since the Middle East conflict began, selling pressure in the eurozone bond market has been milder compared to U.S. and U.K. government bonds. However, Becker argues that Europe’s greater reliance on energy shipments via the Strait of Hormuz and its weaker terms of trade will expose the region to more severe inflationary shocks than other economies.
Several European countries have already announced measures to cut consumer energy bills, and the European Commission is expected to propose additional support packages. These moves have raised concerns that Europe may repeat the policy path of 2022–2024, when large-scale energy subsidies following the Russia-Ukraine war significantly widened budget deficits.
Becker’s bearish stance on German bonds aligns with his long-held view that inflation will remain a key risk. He emphasized that governments tend to respond to crises with fiscal measures and increased debt issuance, adding to his concerns. Earlier this year, Becker established short positions in U.S. and U.K. government bonds, contrary to the prevailing market consensus at the time, which anticipated at least two rate cuts by the Federal Reserve and Bank of England by 2026.
However, the Middle East conflict, which pushed global oil prices above $100 per barrel, upended those rate-cut bets. Money markets now suggest the Fed may not cut rates this year, while the Bank of England and European Central Bank are expected to raise rates at least twice. This shift has rewarded Becker’s bet on rising U.K. bond yields, contributing to a nearly 3% return for his Tactical Opportunities Fund over the past month, compared to an average loss of around 4% for similar funds.
Becker has since taken profits on some U.K. bond positions and shifted focus to Germany. He argues that Germany’s five-year borrowing cost five years forward—a proxy for 10-year yields—should move closer to levels seen in the U.S. and U.K. With Germany’s 10-year yield currently around 3%, well below the roughly 4.4% yield on equivalent U.S. Treasuries, this suggests significant room for German yields to rise further.
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