France's debt troubles combined with Spain's political upheaval and America's own structural deficit problems are pushing the global bond market into a new cycle of turbulence.

On Monday, the U.S. 10-year Treasury yield climbed as high as 5.349% during intraday trading, marking a 24-year high, while the 30-year yield also touched 5.703%. At the same time, France's 10-year government bond yield rose to its highest level since 2002, with its spread over German bunds widening to the broadest since the European debt crisis. The euro has fallen roughly 5% against the dollar this year and has declined for four consecutive weeks.

Analysts point out that Europe's deteriorating fiscal position and political instability, overlapping with the outlook for U.S. midterm elections, could further amplify bond market volatility in the near term. Wall Street does not yet believe the European situation will escalate into a PIIGS debt crisis on the scale of 2009 to 2012, but European uncertainty has become a new variable in the U.S. Treasury selloff.

Multiple pressures stack up as U.S. Treasury yields hit 24-year high

The U.S. 10-year Treasury yield reached an intraday high of 5.349% in New York trading, the highest level since April 3, 2002; the 30-year yield jumped to 5.703%, also the highest since May 2002. According to Reuters, the 10-year yield rose 0.87 percentage points in the third quarter alone, the largest quarterly increase since the first quarter of 1994.

Multiple structural factors are stacking up to drive yields persistently higher. The ongoing war in the Middle East and elevated oil prices keep the risk of renewed inflation alive. The prices sub-index of the U.S. Institute for Supply Management (ISM) services PMI for September rose to 74.0, the highest since July 2022. CME FedWatch data shows that federal funds futures currently price a 67.8% probability of one more Fed rate hike this year and an 18.8% probability of two more hikes.

The Trump administration's tax cuts and military spending on the war with Iran have driven a sharp expansion of the fiscal deficit, with Treasury supply continuously increasing, creating a vicious cycle of rising yields. The U.S. Treasury Department will auction $58 billion in 3-year notes, $39 billion in 10-year notes and $22 billion in 30-year notes from the 6th to the 8th.

In addition, the artificial intelligence infrastructure construction boom led by hyperscale data center operators has spawned a large volume of corporate bond issuance, shifting capital from the Treasury market to high-grade technology debt. According to a Morgan Stanley forecast from July this year, AI-related corporate bond issuance will more than double this year compared with last year, reaching $570 billion. South Korea, Japan and European countries net selling U.S. Treasuries to defend their own currencies have also become important drivers of rising yields.

UK and French bond markets under pressure, euro falls to 17-month low

Turbulence in Europe's bond market is transmitting to the U.S. Treasury market. The UK 30-year government bond yield rose as high as 6.020% during intraday trading, the highest since 1998, and the first time a G7 member's long-term government bond yield has breached 6% since Italy during the 2012 European debt crisis.

France's 10-year government bond yield rose to 4.963%, the highest since 2002, with its spread over German bunds widening to 1.4 percentage points, the broadest since the European debt crisis. According to the Wall Street Journal, Italian and Greek government bond yields also jumped sharply, driven by the concentrated unwinding of hedge fund arbitrage positions accumulated in European government bonds. Eurozone inflation rose 3.8% year-on-year last month, the largest increase since September 2023.

The euro came under corresponding pressure, falling 0.8% to $1.1161 during Asian trading hours, bringing its cumulative decline this year to about 5%, with four consecutive weeks of losses.

France's fiscal predicament sparks nationwide protests, bond market hit by foreign capital exit

Europe's fiscal pressure is most concentrated in France. France's national debt reached 3.596 trillion euros as of the end of June, equivalent to 119% of GDP, and this year's fiscal deficit as a share of GDP is expected to widen from 5.1% last year to 5.4%. In the budget draft published on October 1, the government proposed cutting 43 billion euros in spending, with education spending rising only 1.7% in nominal terms, below the inflation rate.

Fiscal austerity has directly ignited social tensions. Since teachers at a high school in Créteil, a Paris suburb, went on strike on the 17th of last month, nationwide protests have continued to spread. As of the 5th, 400 to 500 schools across the country had been fully or partially closed. According to French Education Minister Édouard Geffray, 24 schools were set on fire or damaged during the protests and 78 staff members were injured; Interior Minister Laurent Nuñez said more than 5,060 people had been detained during the protests, 87% of them minors.

According to Reuters citing French Education Ministry data, average education spending per middle school student in 2024 was 11,660 euros, lower than 11,910 euros in 2010, a decline rather than an increase over 14 years. Behind students taking to the streets are long-standing problems such as overcrowded classrooms, chronic teacher shortages and aging facilities.

As France's fiscal outlook continues to deteriorate, global investors are accelerating their exit from its bond market. According to Reuters, Japanese investors have net sold about 356 billion yen in French government bonds so far this year, while net buying 658 billion yen in German government bonds and 775 billion yen in Italian government bonds over the same period.

Spain's housing crisis triggers political gamble, Europe's energy predicament amplifies global risk

Spain's housing shortage is also weighing on the global bond market. On the 23rd of last month, an 87-year-old woman named Maricarmen Abascal was evicted from a Madrid apartment where she had lived for more than 70 years because her pension could not cover soaring rent, and footage of the incident sparked large-scale street protests after being broadcast on television. Spain has long faced a housing shortage, partly due to rampant property speculation targeting short-term tourism demand.

Spain's parliament subsequently voted down two decrees on the 2nd that would have automatically extended leases until 2028, restricted short-term rental platforms, banned speculative funds from entering the housing market and protected vulnerable tenants. The conservative People's Party, the far-right Vox party and the Catalan separatist party Junts per Catalunya jointly voted to reject them.

Prime Minister Pedro Sánchez announced on the 5th that early elections would be held on the 29th of next month, instead of the originally scheduled timing next summer. Sánchez said a larger progressive majority needed to be built in parliament to overcome resistance from vested interests. For Sánchez, who leads a minority government, the snap election is seen as a political gamble.

From a broader perspective, Europe's challenges go beyond fiscal and political issues. Due to the shocks of the wars in Ukraine and Iran, Europe is suffering from a severe energy supply shortage, and its advanced technology capabilities are also declining, effectively leaving it marginalized from the AI supply chain. This means that once Europe's economic turmoil deepens, its spillover effects on the U.S. bond market and the Federal Reserve's interest rate decisions cannot be ignored.