Pacific Investment Management Co. has become more pessimistic about the future of German government bonds as Germany moves closer to increasing public spending. Sachin Gupta, a fund manager at the company, has reduced their investment in bunds, citing Chancellor-elect Friedrich Merz's initiatives to allocate funds for defense and infrastructure projects. The expected approval of this spending plan has influenced market sentiment towards the bonds. Following Germany's decision to relax its budget constraints, German bonds experienced a sharp sell-off, causing yields on 10-year bonds to reach their highest levels since 2023. This development has also impacted other euro-area countries, with bond rates in Italy, France, and Spain increasing.

Pimco's Gupta has adjusted their overall European duration exposure, anticipating potential shifts in other European countries' fiscal policies. The increased defense spending in the eurozone has led traders to reduce expectations of further interest-rate cuts by the European Central Bank. Even though there is a possibility of some adjustments based on economic data, Gupta believes it is premature to consider interest rate hikes. German 10-year bond yields fell slightly on Monday, and UBS Group AG analysts suggest buying these bonds around a certain rate.