Macroeconomic forecasting consultancy TS Lombard stated that the market is currently underestimating domestic political risks in Germany, and German government bonds could be subject to risk repricing due to unexpected bad news.
The Saxony-Anhalt state election on September 6th warrants particular attention. The Alternative for Germany (AfD) currently enjoys approximately 41% support and may form a single German state for the first time; in Mecklenburg-Western Pomerania, the AfD also leads with approximately 36% support.
Meanwhile, the stability within Merz's government is declining, with Merz's approval rating falling to its lowest level among incumbent German chancellors on record. Discussions have even arisen in the market about Hendrik West, the Minister-President of North Rhine-Westphalia, succeeding him.
If Germany itself begins to be required to incorporate political risk premiums, the term premium of German bonds could rise further, leading to a higher central level of yields on European government bonds. At the very least, further victories for the AfD could prompt investors to reassess the German political landscape and further push up the already rising term premium of German bonds.
