What’s going on here? Investors bolstered European defense stocks on Monday, after NATO hinted that the region may need to spend a lot more on its front line – weekly martial arts classes simply won’t cut it. What does this mean? The US and Europe tend to approach defense measures together, with the States providing the bulk of the military sway. But now that a new president is occupying the White House, America has been leaving Europe on the sidelines – not least when it comes to holding discussions with Russia. So, concerned that the region can no longer rely on the red, white, and blue to foot the security bill, NATO leaders have suggested that Europe’s defense budget should be increased to over 3% of the size of its economy – up from the old target of 2%. Why should I care? For markets: The great European delicacies… cheese, wine, and ammunition. Anticipating that Europe will extend its shopping list, investors sent shares in defense companies to record highs. While the industry’s stocks have been on the up ever since Russia invaded Ukraine in 2022, it’s European ones receiving the most attention right now. See, the region’s governments are – understandably – eager to buy local, rather than importing from the US. Major firms like Rheinmetall are prepared: they’re already planning to scale up production to match their stateside counterparts. The bigger picture: Bonds are stirred, not shaken. To fund this amped-up arsenal, European governments could flood the market with new bonds. That increased supply would weigh down bond prices, so their yields – the return you can expect for holding them – would be nudged up to offset worries about rising debt levels. Plus, because more governmental shopping sprees could aggravate inflation, central banks may be forced to raise interest rates. That, too, would move bond prices down and yields up. You can already see the pattern playing out: German and British bond yields have moved higher thanks to projections of flashier spending. | 