Supply versus risk in sovereign yields: Evidence from Germany’s 500 billion fiscal shock

• €500 billion plan lifts 10-y Bund CAC by 10 bp over 3-day event window • Euro sovereign yields co-move while non-euro-area yields show no response • Nelson-Siegel factors are consistent with the supply channel • CDS reactions offer no clear evidence of a dominant risk-repricing channe We study whether the German fiscal announcement of 4 March 2025, which introduced a €500 billion Sondervermögen for infrastructure and a permanent exemption of defense spending above 1 percent of GDP from the debt brake, raises sovereign yields through the supply channel or through sovereign risk repricing. Based on an event study, we observe a cumulative abnormal increase of 10 basis points in the 10-year Bund yield over a three-day event window, with similar shifts across other euro-area sovereigns. Nelson-Siegel factors reveal the strongest adjustment in the curvature component, consistent with expected Bund issuance. Sovereign and corporate CDS premia show limited and statistically fragile changes, suggesting no clear increase in perceived default risk.