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In the week in which Donald Trump held out the prospect of $5,000 for every American adult, the US 10-year yield rose to almost 5 percent, an important psychological threshold. But should we perhaps be more concerned about a country closer to home? Is the market beginning to lose confidence in France?
The yield on 10-year US Treasuries rose by almost 20 basis points this week to around 4.95 percent. This puts the yield at its highest level since 2023 and close to its highest level since 2007. One important difference compared with 2007 is the size of the US national debt. At the time, it stood at around 62 percent of GDP, compared with almost 123 percent today. A comparable interest-rate level can therefore place far greater strain on US public finances today.
Yield on 10-year US Treasuries (source: Bloomberg)
According to Bloomberg, the sell-off is being driven in part by investors betting on further declines in bond prices. It comes ahead of the US inflation figures for August, which will be published on Friday afternoon at 2:30 p.m. Dutch time. The rise in the oil price may also push the inflation figure higher.
The inflation figures are important because investors want to be compensated for the loss of purchasing power caused by inflation. Higher expected inflation therefore generally leads investors to demand higher yields on government bonds. Market interest rates also reflect expectations regarding the Federal Reserve’s policy rate and other risks. A higher-than-expected inflation figure could strengthen expectations of further rate hikes and push bond yields even higher.
When market interest rates rise, newly issued bonds offer a higher rate of interest. Existing bonds with a lower fixed rate consequently become less attractive and fall in price. That lower purchase price compensates new buyers for the lower interest payments, bringing the total return in line with that of a new bond with the same remaining maturity and risk profile.
“These are worrying times for the bond markets,” Padhraic Garvey, head of research for the Americas at ING, told Bloomberg. According to him, a US 10-year yield of 5 percent now appears inevitable.
These interest-rate movements affect almost everyone. Consider, for example, mortgage rates: the average rate on a 30-year US mortgage has crossed the 7 percent threshold this week. This could put considerable pressure on the housing market.
Scott Bessent (source: Flickr/U.S. Mission photo/Eric Bridiers)
US Treasury Secretary Scott Bessent said that the market for US Treasuries was "in very good shape" and played down concerns about rising yields. His department had increased the maximum size of its buyback operation for long-dated Treasuries to $6 billion and ultimately bought back $5.19 billion worth of bonds on Thursday. The additional demand can support bond prices and thereby push yields lower. This time, however, the intervention did not have the desired effect: the sell-off continued and bond yields rose further.
Jeroen Blokland believes this creates a risk that Bessent will have to intervene more and more to keep yields under control. Now that the department has shown that it responds to rising yields, investors may, according to him, continue to test how far the US government is willing to go. Blokland writes: "Bessent learned an important lesson today. Once you show the markets that you are willing to adjust your policies when they move against you, they will always demand more. The US Treasury had already announced that it would at least double its buybacks of longer-dated Treasuries. Today, Bessent tripled the size of the ‘Treasury Twist’ operation to $6 billion. What did bond yields do? They went up."
According to economist Robin Brooks, the US government has backed itself into a corner. Investors see the expanded buyback operations as a first step towards artificial caps on interest rates and are testing how far the department is willing to go. If the government has to buy ever more bonds to push yields lower, this could undermine confidence in the dollar and strengthen the debasement trade, with investors turning to gold and other precious metals.
Trump’s statements are unlikely to have eased the turmoil in the bond market either. He promised every American adult $5,000 if the Republicans retain both the House of Representatives and the Senate in the midterm elections. With around 240 million adult citizens, this would cost almost $1.2 trillion, more than $200 billion above the Pentagon’s entire budget request for 2026.
Interest costs in OECD countries are rising; the bar for 2026 will be considerably higher (source: X/FT)
Yields on US Treasuries were not the only ones to rise. The yield on the 10-year German government bond, the Bund, climbed above 3.5 percent, its highest level since 2009. In our podcast this week, Han de Jong explained why France’s public finances may be even more concerning than those of the United States and Germany. He explained that French government debt as a percentage of GDP is comparable to that of the United States. Unlike the US, however, France is experiencing hardly any economic growth. Its debt-to-GDP ratio therefore risks rising more rapidly. Last Thursday, the growth forecast for 2026 was revised down from 0.7 to 0.4 percent.
Economist Daniel Lacalle also sees France as a weak link. He warns that the next debt crisis could erupt in the eurozone before the United States, although the US national debt of $40 trillion is also a legitimate cause for concern. Among other things, he points to the eurozone countries’ substantial unfunded future liabilities, such as pensions. These are not fully reflected in official government debt figures and, according to him, exceed 300 percent of GDP in several major eurozone countries.
French 10-year yield (source: Trading Economics)
The French 10-year yield has risen very rapidly this summer, with a prominent presidential candidate even suggesting “burning” government debt. At the end of June, it was still just above 3.5 percent; it is now moving towards 4.5 percent. The French 30-year yield reached a level last seen in 2003.
Robin Brooks warns about this move: "What is happening to yields on long-dated French government bonds is alarming. There is no other way to put it. This calls for a fundamental reform of fiscal policy and serious debt reduction, but the country is politically paralysed in the run-up to next year’s elections."
Banque de France Governor Emmanuel Moulin also describes the economic situation as worrying. This week, in response to the ECB’s interest-rate increase, he called on the government and parliament to take measures to reduce the budget deficit. But as regular readers know, there is very little chance of the deficit being reduced substantially. "Interest rates are rising and interest costs are increasing. By 2028 or 2029, we will easily be paying €100 billion a year," Moulin said of the cost of servicing France’s government debt. That is around 3 percent of the entire French economy and approximately 6 percent of total government spending.
We discussed with Han de Jong how the market is beginning to lose confidence in France. Lacalle sees this too: “French government debt is expected to amount to around 118 percent of GDP in 2026 and could rise to almost 130 percent by 2030. The markets now realise that no new prime minister will seriously cut public spending. Instead, the same failed approach of the past three decades is likely to be repeated: raising taxes and postponing necessary spending cuts.” Han de Jong considers it possible that the ECB will eventually deploy the Transmission Protection Instrument (TPI) and buy French government bonds to curb the rise in yields.
It will be very interesting to follow French interest rates as the presidential election in April approaches. We will, of course, continue to do so for you!
