France Government Bond 5Y

ING's Chris Turner argues that the French debt sell-off has broken the narrative of ever-higher short-term rates and raised doubts about further European Central Bank tightening. The French risk premium is weighing on the Euro, according to Turner. The sell-off has cast doubt on the prospect of additional ECB rate hikes.

Global bond markets faced heavy selling pressure, driving borrowing costs from the United States, France and Britain to Japan up to multi-decade highs amid concerns over inflation, elevated energy prices and the prospect that interest rates may stay high for a long time. The 10-year US Treasury yield, a key gauge of global borrowing costs, climbed to 5.34% during trading, the highest since 2002, after posting its biggest quarterly rise since the start of the century in the three months through September, before bargain hunting helped the yield ease back to around 5.26% in late US trading. In France, the 10-year bond yield rose close to 5%, the highest since 2002, after the French bond market turned in its worst quarterly performance since 1987, while the yield spread with Germany sat near its widest since the eurozone debt crisis and the cost of insuring against a French default hit its highest since 2013. In Britain, the 30-year bond yield surged past 6%, the highest since 1998, and Japan saw government bond yields rise by double-digit amounts for a fifth consecutive quarter, something never seen before. The Institute of International Finance estimates that over the past year, developed economies paid more than 3.3 trillion dollars in interest on government bonds traded in international markets, more than the roughly 2.6 trillion dollars in estimated global AI spending, 3.1 trillion dollars in defence spending and 2.3 trillion dollars in clean energy. Investors are rapidly shifting their views, with the market expecting the Fed to raise rates at least three more times before mid-2027 and the ECB to raise rates another three times, by 0.25% each, also by mid-2027.

Interest rates are rising sharply around the world, and with inflation fears spreading on higher crude oil prices, the US long-term rate briefly touched the 5.22% level on the 24th, a 19-year high. Rates are also climbing in major European economies such as France and Germany. With tensions in the Middle East persisting, attacks on Saudi Arabia by Yemen's Iran-aligned Houthi militant group have intensified, crude oil futures are regaining upward momentum, and the major central banks of Japan, the United States and Europe are scrambling to contain inflation, having all raised rates in September. In the markets, expectations that the Bank of Japan and the US Federal Reserve will accelerate the pace of rate hikes going forward have fueled a view that rates will stay high, and in Japan, with the Takaichi administration leaning toward fiscal expansion, worries about deteriorating public finances are adding momentum to selling of government bonds. In the Tokyo market on the 25th, the long-term rate briefly rose to a 30-year high, but Finance Minister Satsuki Katayama said only that rates are affected by a variety of factors, including long-term ones, and that her ministry is doing what it can. Market participants point out that until the Middle East situation calms down, rates are likely to remain unstable.

A growing divergence in European government bond yields is raising a hidden risk for financial markets, with borrowing costs in major Western European economies climbing toward levels last seen nearly two decades ago, KB Securities said. Ten-year government bond yields in major Western European countries have already moved above their 2023 peaks and are approaching their 2007 highs, while the U.S. 10-year Treasury yield, although above 4.8%, remains below its 2023 peak. The more important concern is the widening gap between Western and Southern Europe: yields in France and Germany have risen sharply, while those in Spain and Italy remain below their 2023 peaks and have increased at a more moderate pace. KB Securities attributes the divergence to fiscal positions, with France and Germany expected to run budget deficits of about 5% to 6% of GDP next year, compared with 2% to 3% for Spain and Italy, which keeps the latter within the EU's 3% fiscal-deficit threshold. The divergence echoes the period before the 2011 euro zone sovereign debt crisis, but KB Securities does not see an imminent crisis, noting that the bigger risk could emerge when the economic cycle turns lower, making the next downturn a key test for European markets.

A global bond selloff that pushed yields to two-decade highs has made government debt the main concern on Wall Street, overshadowing the AI boom. Yields surged in the U.S., U.K., France, Germany, and Japan as investors lost patience with persistent deficits and heavy government borrowing. The Treasury Department announced increased buybacks of long-dated bonds, but yields resumed their climb as investors doubted the move would stem the tide. Economists including RSM's Joseph Brusuelas and Capital Economics analysts said markets are now demanding higher term premiums for fiscal, geopolitical, and policy uncertainty, and warned that continued populist spending and tax cuts could eventually trigger banking or currency crises.

Bond markets around the world are facing one of the largest selloffs of long-term government bonds in history, pushing yields sharply higher and driving long-term borrowing costs for governments and the private sector to their highest levels in a decade. In the United States, the yield on the 30-year Treasury bond climbed to 5.32 percent, its highest level since mid-2007, while French government borrowing costs surged to 4.87 percent, the highest since 2008. German and UK government bonds also hit multi-year highs, and Japan saw yields rise close to 4.07 percent. The main factors driving this crisis include geopolitical risks that are pushing energy prices higher, persistent inflation that is forcing central banks to keep interest rates elevated for longer, and concerns about fiscal discipline among governments that are issuing large amounts of debt. At the same time, the structure of global bond holders is changing, as pension funds and the public sector reduce their holdings of long-term bonds and shift more into equity markets. This leaves the market more reliant on price-sensitive private investors, raising the risk premium for holding long-term bonds, and the higher interest burden will be passed on to businesses and households through more expensive borrowing costs.