For 15 years, Western public debt has functioned as the financial system's safety net. Investors bought it when they feared something and central banks when they wanted to stimulate. Its price had little to do with the solvency of the issuer. That era has ended almost without us knowing it. The ten-year US Treasury bond has recorded its highest yields in almost a quarter of a century, and the contagion has crossed the Atlantic with a speed that has surprised even the most pessimistic. What is relevant is no longer just how much it costs to borrow, but that the markets have once again asked themselves who deserves to be lent and at what price.
This time the starting point was not the European periphery, but the United States. A persistent deficit in full expansion, an issuance calendar that the market digests with increasing difficulty and inflation that refuses to go down have returned to the curve something that seemed forgotten, the term premium. The investor demands more to immobilize his money for ten or 30 years because he no longer trusts that inflation, fiscal policy or the central bank itself will follow a predictable script. That the long sections rise more than the short ones is not a technical detail. It indicates that the problem is not today's rates, but tomorrow's credibility.
The geopolitical factor has been added to this underlying malaise. The conflict in the Middle East has pushed oil to levels that revive memories of 2022, and trade tensions, with tariffs that come and go, make supply chains more expensive and make any price forecast difficult. The result is an uncomfortable cocktail for central banks. The Federal Reserve has raised rates again and its minutes suggest it is not done. The ECB, which a year ago celebrated having tamed inflation, has chained two increases and the market is discussing whether there will be a third before Christmas. None gives firm guidance, and in debt markets the lack of guidance is paid for with volatility.
In Europe, the proper name is France. Its risk premium is at its highest since 2012. Paris is currently financed more expensively than Rome and much more expensively than Madrid, something unthinkable a decade ago. The reasons are known. A deficit that does not give way, a parliamentary fragmentation that blocks any credible budget, a presidential election on the horizon and a record volume of emissions expected for next year. The most disturbing thing is that this is the core of the eurozone, not the periphery. If the market starts treating the euro's second-largest issuer as a credit risk, no one is safe.
Are we facing a repeat of the 2010-2013 crisis? Although there are parallels, there are at least three differences. The first is that the ECB has tools that did not exist then, starting with the anti-fragmentation instrument designed precisely to stop unjustified premium increases. The significant nuance is that its activation requires the country to comply with European fiscal rules. Using it to support a State that fails to comply would be politically explosive. Therein lies the real test for Frankfurt. The second is that the European financial sector becomes much more capitalized and less exposed to the diabolical loop between sovereign debt and bank balance sheets. The third is that, until now, no one is talking about the breakup of the euro. The market is pricing in fiscal indiscipline, not the end of the single currency, and that changes the magnitude of the risk.
Tense surveillance
There is one element that makes this episode potentially more uncomfortable than the one from 15 years ago. So the problem was in a few countries and the refuge was clear: Germany and the United States. Today the rise in prices is widespread, Washington is part of the problem and the traditional refuge is no longer so. When all sovereigns become more expensive at the same time, there is nowhere to run within fixed income. The most striking thing is the contrast with the Bags. With shocks, sharp sales on the days of the worst auctions and frenetic rotations, but the major US indices continue to set highs sustained by artificial intelligence. Big technology companies' profits are growing at a pace that justifies, at least on paper, demanding valuations, and investment in data centers underpins much of US growth. It is a rational bet as long as profits grow faster than the rate at which they are discounted rises. However, bonds and stocks tell two incompatible stories. Equities are betting on a productive revolution that will make the economy grow enough to pay the debt. Fixed income doubts that this growth will arrive on time and demands to be compensated for the risk that it will not arrive. One of the two is wrong, and history suggests that the bond market rarely does so for long.
Among analysts and investors, it is not panic that dominates, but rather tense vigilance. Each auction is followed as an examination and each inflation data as a verdict. The consensus expects long rates to stabilize if oil yields or if governments present credible fiscal plans. But few dare to bet on it. For years, governments got used to borrowing without the market holding them accountable, and now the bond reminds them that cheap money had an expiration date.
