France faces bond market squeeze as US debt spiral reshapes global capital flows
The US government's soaring debt and rising interest payments are pushing up yields on US Treasuries, forcing other countries like France to raise their own bond yields to remain competitive. Reduced demand from major US bond buyers such as China, Japan, and Gulf states is exacerbating the situation. France, with high debt and deficit ratios, is particularly vulnerable to these global shifts.
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The United States government now carries more than $40 trillion in debt, a figure that has doubled over the past decade. Interest payments by Washington are running 15 percent higher than in the same period last year. The US Treasury must now offer higher yields to attract buyers for its bonds, a situation not seen for many years. Yields on long-term bonds have reached levels last observed before the 2008 financial crisis.
This tension is not confined to the US market. Mohamed El-Erian, a bond market analyst, told Handelsblatt that demand for US Treasuries from three major sources has declined. China has scaled back purchases for geopolitical reasons. Japan is selling US bonds to support the yen. Gulf states are redirecting capital to meet domestic needs. As a result, the US must offer even higher interest rates, and this dynamic could persist for an extended period.
When US yields rise, other countries must raise their own bond yields to stay competitive and attract capital. This international linkage means that a shock in the US market rapidly transmits to other sovereign borrowers, especially in Europe and Asia.
France now faces a situation described by analysts as dramatic. The yield on ten-year French government bonds has climbed to levels unseen since the financial crisis. In 2025, France's government debt stood at 115.6 percent of GDP, while its budget deficit was 5.1 percent of GDP. These ratios put France among the most indebted major economies in the euro area.
The National Assembly is split into three nearly equal blocs, each with sharply divergent positions on fiscal policy. This fragmentation makes it nearly impossible to implement austerity or even moderate spending restraint. According to El-Erian, France is now very vulnerable to shifts in investor sentiment. If global investors can earn higher returns in the US, France must increase yields to compete, raising its own cost of borrowing.
Higher interest payments add to the debt stock, which in turn requires even higher yields to entice buyers. The spiral is self-reinforcing.
Japan and the United Kingdom are also identified by El-Erian as among the world's three most vulnerable sovereign borrowers. Japan's situation is complicated by its efforts to stabilize the yen by selling US Treasuries. The UK faces its own fiscal challenges after years of political volatility and persistent current account deficits. The three countries share high debt ratios, aging populations, and limited fiscal space to respond to shocks.
In the 1980s, a similar configuration of high global debt, speculative capital flows, and rising US interest rates triggered a cascade of sovereign defaults and a global recession. The 2008 financial crisis demonstrated again how quickly stress in US financial markets can propagate worldwide.
The European Central Bank now has a wider array of tools to intervene in bond markets than it did during the eurozone crisis. Massive bond purchases have become standard practice to calm markets and cap yields. ECB officials argue that these tools can prevent a repeat of the 2010-2012 euro crisis, when spreads between German and peripheral eurozone bonds exploded.
Such interventions come with costs. Large-scale bond buying can fuel inflation and erode the value of the euro, potentially undermining confidence in the currency.
In France, the stakes are heightened by the approach of presidential elections. The possibility that Marine Le Pen, of Rassemblement National, could win the presidency in 2027 is seen by some investors as increasing political risk. Le Pen's economic platform has previously included proposals to challenge EU fiscal rules and even, at times, to reconsider France's position in the eurozone. Even if she moderates her stance, uncertainty around fiscal policy is likely to keep risk premiums elevated. Investors may demand even higher yields to compensate for perceived political and economic instability.
The rapid growth in US debt and interest costs limits fiscal maneuvering. The Federal Reserve's ability to support the Treasury market through large-scale purchases is complicated by concerns about inflation, which remains above the central bank's target. If the Fed were to lower rates to ease Treasury financing, it risks reigniting inflation. If it keeps rates high, debt service costs rise further, crowding out other spending and potentially eroding confidence in US fiscal sustainability.
Higher US rates have historically triggered capital outflows from developing economies, leading to currency depreciation, rising borrowing costs, and in some cases, sovereign defaults. The 1987 crisis began with trouble in emerging markets before spreading to advanced economies. Today, many developing countries have built up substantial foreign currency reserves and have more flexible exchange rates, but their exposure to global interest rate shocks remains significant.
Global debt levels, both public and private, are at or near record highs. The synchronised rise in yields across major economies reflects not only country-specific risks but also a shift in the global supply and demand for safe assets. With the US, France, Japan, and the UK all competing for capital, and with traditional buyers reducing their purchases, the system is under strain.
Market sentiment is notoriously difficult to predict. Central banks have more tools than in the past, but their room for maneuver is not unlimited. Political cycles, such as the French presidential election, can trigger sudden shifts in investor confidence. The possibility of a new euro crisis is not the base case for most analysts, given the ECB's current posture, but nor can it be ruled out if fiscal and political pressures mount.
Inflationary pressure in the euro area has moderated, giving the ECB some latitude to intervene without immediately stoking inflation. Euro area countries have made some progress in cleaning up bank balance sheets and improving fiscal transparency since the last crisis. These factors could delay or soften the impact of a shock.
France, Japan, and the UK face the greatest exposure to capital flow disruptions given their reliance on bond markets and current fiscal positions. The structural shift in US Treasury demand—driven by China's geopolitical reorientation, Japan's currency support needs, and Gulf states' domestic priorities—has already forced Washington to raise yields significantly. These higher rates will cascade through global markets, directly affecting borrowing costs for other developed economies.
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