Debt storm resurfaces! Political crisis combined with fiscal black hole, the 30-year government bond yields of the UK, Germany, and France hit a multi-year high

The long-term government bond yields of major European economies are accelerating upward, with the 30-year government bond yields in the UK, Germany, and France reaching new highs since the financial crisis and even this century. Investors are reacting strongly to the expanding fiscal deficits and policy uncertainties.

On Tuesday, the UK 30-year government bond yield rose to 5.72%, the highest since 1998, while the 30-year government bond yields in Germany and France reached 3.41% and 4.51%, the highest levels since 2011 and 2009, respectively. The British pound weakened significantly against the US dollar, European stock markets came under pressure, and market risk aversion increased.

The core factors driving the rise in yields include significant increases in fiscal spending by European countries to address geopolitical security and economic recovery, while political turmoil in France and the UK has further exacerbated market concerns about policy coherence. Meanwhile, investor doubts about the persistence of inflation and the outlook for central bank policies have led to a continued weakening of demand for long-term bonds.

Analysts warn that the current "vicious cycle"—debt concerns pushing up yields, which in turn exacerbates fiscal burdens—could pose a substantial threat to the economic recovery and financial stability in Europe.

Political Turmoil and Fiscal Dilemmas Intertwined, Long Bond Yields Soar, Market Confidence Under Pressure

Market participants generally believe that the deterioration of fiscal conditions and political uncertainty in major European economies are the main reasons for the surge in yields.

UK Chancellor of the Exchequer Rachel Reeves faces a £35 billion budget gap, and Prime Minister Starmer has just undergone a cabinet reshuffle, but this has failed to alleviate investor concerns about the fiscal outlook. The market questions the dominance of fiscal policy and worries that the government may struggle to effectively address debt pressures.

In France, the Borne government is pushing a $51 billion budget cut plan to curb the deficit, but political divisions are severe, and the prospects for a confidence vote are concerning. Last year, France's deficit accounted for as much as 5.8% of GDP, making fiscal consolidation extremely challenging.

Although German bonds are viewed as safe-haven assets, they have also faced selling due to significant increases in defense and infrastructure spending. Analysts point out that the fiscal expansion in several European countries stands in stark contrast to weak economic growth, leading to doubts about the sustainability of policies.

Investor demand for long-term government bonds continues to weaken, and the UK Debt Management Office has reduced the issuance of ultra-long bonds to historic lows, yet yields remain high. The demand from traditional buyers, such as pension funds, has declined, further exacerbating market volatility.

Inflation and Uncertain Central Bank Policy Outlook, "Vicious Cycle" Risks Intensify

Inflation pressures and the direction of central bank policies are also important factors pushing up yields.

High inflation in the UK may limit the Bank of England's room for further rate cuts, weakening its ability to stimulate the economy. Eurozone inflation data for August exceeded expectations, leading the market to anticipate that the European Central Bank will maintain a high interest rate policy.

US Treasury yields are rising in tandem, and global bond market risk appetite is declining. Investors are concerned that high debt levels and trade policies in the US and Europe may bring new inflation pressures, further pushing up global long-term interest rates Multiple institutions warn that the European bond market is falling into a "chronic vicious cycle"—debt concerns are driving up yields, which in turn increases fiscal burdens, further triggering market worries. Analysts at Deutsche Bank AG point out that unless countries implement stronger fiscal consolidation measures, the upward pressure on yields is unlikely to ease.

Jefferies Financial's Chief European Strategist Mohit Kumar states that tax increases in countries like the UK have become inevitable, but further tax hikes may backfire. The market generally holds a negative view on ultra-long-term bonds and advises investors to adopt a steepening curve strategy