By Nikhil Sharma

(Reuters) -German indexes led robust gains in Europe on Wednesday after sharp declines in the previous session as the country’s leaders agreed to overhaul borrowing rules to boost defence spending and revive growth.

Germany’s blue-chip index jumped 3.4% as of 0930 GMT to trade near a record high, while the midcap index soared 10.3%, on track for its biggest daily gain in three years.

The parties hoping to form Germany’s next government agreed to create a 500 billion euro ($534 billion) infrastructure fund and loosen fiscal rules.

Germany’s 10-year bond yield jumped 19 basis points to 2.670%, while the 30-year yields rose 15 bps to 2.97% after briefly hitting their biggest daily climb since October 1998.

"Germany does have a very underleveraged balance sheet as far as countries go, and anything it can do to spend and stimulate growth, the market would respond positively to," said Patrick Armstrong, chief investment officer at Plurimi Wealth.

"It’s the combination of easier fiscal rules in Europe combined with tariffs that may not be as long lasting as what the market was worried about yesterday."

The country’s construction firms and arms makers jumped. Cement maker Heidelberg (ETR: HDDG ) Materials rose 10.1%, industrial services provider Bilfinger jumped 17.3% and construction group Hochtief (ETR: HOTG ) advanced 15%.

Defence stocks Rheinmetall (ETR: RHMG ) and Renk were up 5.8% and 9.3%, respectively.

Europe’s construction and materials index, and defence-centric index were both trading at record highs, climbing 4.5% and 3.7%, respectively.

The pan-European STOXX 600 index was up 1.5% in early trading. The benchmark index logged its worst day since August 2024 on Tuesday as U.S. President Donald Trump’s new 25% tariffs on imports from Mexico and Canada took effect.

Although there was some respite after U.S. Commerce Secretary Howard Lutnick said Trump was considering granting relief to products that comply with rules under the U.S.-Mexico-Canada Agreement on trade.

The index of European banks rose 3.7% to hover near a record peak.

Among stocks, Adidas (OTC: ADDYY ) fell 1.8% after the sport retailer forecast sales growth slowing slightly to up to 10% in 2025.

Bayer (OTC: BAYRY ) jumped 5.9% after the drugs and farming pesticides maker raised the prospect of a return to earnings growth next year but reiterated that a decline was expected for this year.

British construction and infrastructure group Balfour Beatty (OTC: BAFYY ) lost 5.6% to the bottom of STOXX 600. The company named Philip Hoare as its next CEO.

($1 = 0.9360 euros)