A fire needs a spark and something dry to burn. In this year’s global bond rout, Heard on the Street’s Aaron Back argues, oil was the spark and government debt is the kindling. FactSet’s numbers: the 10-year Treasury yield climbed 0.83 percentage point in the third quarter, its steepest quarter since 1994, and France’s and Italy’s 10-year yields climbed more, 1.29 and 1.28 points. Same oil shock; very different burns.
Line the G-7 up by debt and the pattern’s hard to miss. Italy owes 149% of GDP, the U.S. 126% and France 117%, on OECD figures for 2025; Germany, the U.K. and Canada carry less and saw smaller moves. France’s ratio is below ours, but politics is front of mind there, and investors fear a populist president from either flank could send that number soaring. Japan’s the outlier — gross debt above 200% of GDP but only about a 0.4-point rise — because its government holds big financial assets and ran a deficit of just 1.7% of GDP in 2024. The U.S. tell is the term premium: San Francisco Fed calculations show investors demanding more to hold long bonds than expected short-term rates can explain. That points past the Fed, toward who’s paying the bills.
The rout moves to Paris
Friday’s paper showed what that looks like in real time. On Thursday the two sides of the Atlantic parted ways: money ran to Treasurys, easing the 10-year to 5.233% from Wednesday’s 5.292% — its highest in more than 24 years — while leveraged hedge-fund bets on Europe came apart and French, Italian and Greek yields shot up. The euro slid to around $1.12 and France’s CAC 40 fell 1.6%. France’s own 10-year neared 5% for the first time since 2002. Paris proposed €43 billion of 2027 cuts, part of a €54 billion package meant to bring the deficit to 5% of GDP from 5.4% — yet its debt agency plans record borrowing of $380 billion next year, and interest costs are set to rise 15% to €91 billion. “Time is not in their favor,” ING’s Benjamin Schroeder said. By Friday, the Weekend paper’s front page showed students clashing with riot police across France over school funding.
The backdrop isn’t cooling. Eurozone inflation hit 3.8% in September, a three-year high, after Brent topped $105 at points during the month, and the ECB has already raised to 2.5%; President Christine Lagarde says higher long-term yields will do some of its cooling for it. Back’s kicker: countries with credible deficit plans should see less turbulence, and he doesn’t expect the U.S. to be among them. By Friday’s close the 10-year was back at 5.276%.
Our read
Fixed Income (IN02): this is why long Treasurys stay off the new-idea list even at yields that look generous. A long bond is a bet on the term premium, and Back’s point is that the premium now hangs on politics — whether Washington produces a credible deficit plan — at least as much as on the Fed. Nobody can schedule that. The week’s scoreboard, from the Journal’s tables: the iShares 20+ Year Treasury Bond fund (TLT) lost 2.32%, the 1-3 year Treasury fund 0.20%, and TLT is down 11.1% this year. TLT sits in 4 of our model books, held at weight; nothing added.
The rule doesn’t change: match bonds to the dates you need the money. Cash for the next couple of years belongs in Treasury bills or floating-rate Treasurys, which is where the house keeps its safe money — SGOV in 49 model books, USFR in 14, held at weight; nothing added — and the 13-week bill’s latest auction cleared at 4.110%. If you want to lock in yield for a bill that comes due later, an individual Treasury or a defined-maturity fund that matures on your date lets you ride out the price swings in between; a long bond fund never matures. You don’t wait for the blaze to check how dry the brush is — looking up your bond sleeve’s duration takes ten minutes.