The global bond selloff is spreading from US Treasuries into Europe, sending European government bond yields sharply higher and spreads widening rapidly, with market concerns over a fresh wave of debt risk clearly intensifying.

European bond markets suffered a violent selloff on Thursday, with the French 10-year government bond yield briefly rising to 4.96%, the highest since 2002. The France-Germany spread widened to 1.4 percentage points, while Italian and Greek government bond yields also climbed in tandem. The UK 30-year gilt yield broke above 6% for the first time. Meanwhile, the US 10-year Treasury yield briefly rose to 5.34% during the session, the highest in nearly 24 years, before falling back to 5.24%.

Columbia Threadneedle portfolio manager Ed Al-Hussainy warned that the market "faintly carries the whiff of a crisis brewing."

This round of selling was mainly driven by renewed expectations for inflation and interest rates. Middle East conflict pushed energy prices higher, with Brent crude rising 4.4% on Thursday to $102.31 per barrel. At the same time, persistently strong US economic data intensified concerns that interest rates will remain elevated for an extended period. Fiscal pressures within European bond markets and forced liquidation of highly leveraged hedge fund positions further amplified volatility.

The sharp swings in bond markets also weighed on risk assets. The pan-European STOXX 600 fell 1.3%, the FTSE 100 dropped 1.7%, European bank stocks came under clear pressure, and the euro fell to its lowest level in more than a year. US equities were relatively resilient, with the S&P 500 rising 0.2% and the Nasdaq 100 gaining 0.3%.

US Treasury Yields Hit 25-Year High, "Vicious Cycle" Warnings Emerge

The US 10-year Treasury yield briefly rose to 5.34% on Thursday, the highest in 24 years, before retreating to close at 5.24%, down 5 basis points from the previous trading day.

Nomura global head of macro research Rob Subbaraman said the scale of the recent government bond selloff has left traders "stunned," with higher inflation expectations and concerns over the sustainability of government deficits jointly driving yields higher.

RBC BlueBay Asset Management head of market strategy Mike Bell noted that many investors are being forced to stop out of positions or are choosing to exit as yields continue to rise, pushing the market into a "vicious cycle."

However, after the violent selloff in European bond markets, US Treasuries instead saw safe-haven buying. RBC Capital Markets US rates strategist Izaac Brook said market focus has shifted from US fundamentals to overseas yields, with investors seeking "safe assets" and driving flows into Treasuries.

Bond market stress is also beginning to transmit to the real economy. Freddie Mac data showed that the traditional US 30-year mortgage rate rose to 7.28% this week, a single-week jump of 25 basis points, the largest weekly increase in four years.

French Budget Fails to Restore Confidence, Political Risk Adds Pressure to Bond Market

France became the epicenter of this round of European bond market volatility. The French 10-year government bond yield saw intraday swings of up to 16 basis points, double the average daily range. The France-Germany spread widened to 1.4 percentage points, the highest level since the European debt crisis.

The French government unveiled its 2027 budget plan on Thursday, proposing about 43 billion euros in spending cuts and tax increases, with the goal of reducing the fiscal deficit to 5% of GDP. But the market response remained muted. ING rates strategist Benjamin Schroeder said the market had originally expected a budget demonstrating fiscal consolidation efforts to receive a more positive response, but "the market simply skipped past that step."

TS Lombard economist Davide Oneglia pointed out that French polling shows far-left candidate Jean-Luc Melenchon gaining support ahead of next spring's presidential election. He has previously proposed canceling part of the French government debt held by the central bank, a stance that has become a "green light signal" for investors to short French government bonds.

Hedge Fund Forced Liquidations Amplify European Bond Market Volatility

According to traders cited by The Wall Street Journal, this round of European bond market turmoil was largely amplified by forced deleveraging among hedge funds.

For years, a large number of investors, including hedge funds, poured into the French government bond market, profiting from trading the spread between bond yields and related interest rate swaps. Such trades are highly dependent on leverage and require bond yields to remain relatively stable. As yields continued to climb, related positions have been unwound continuously in recent weeks, with Thursday's liquidation particularly severe.

RBC Capital Markets head of US rates strategy Blake Gwinn said there are several "quite crowded" popular trades in the European bond market, and "all of these structural positions have taken losses."

As French bond liquidity dried up, investors shifted further toward selling Italian and Greek government bonds, spreading risk to other European bond markets and reviving concerns about European debt crisis-style contagion. TD Securities rates strategist Pooja Kumra said the related volatility "has already been quite significant" and requires policymakers to send clear signals of intervention.

Alphidence Capital founder Igor Yelnik warned that current hedge fund leverage is higher than the last time interest rates were at similar levels, which could further form a vicious cycle.

Bond Selloff Spreads to Credit Markets, ECB Rate Hike Expectations Cool

The impact of the bond selloff is also beginning to spread to corporate credit markets. ICE BofA data showed that the spread on European investment-grade corporate bonds relative to government bonds rose to about 90 basis points this week, the highest level since April.

Vontobel Asset Management head of investments Andrew Jackson said that as government bond yields rise further, the risk of credit spreads continuing to widen is increasing.

At the same time, policy pressure on the European Central Bank is also rising. Investors sharply cut bets on future ECB rate hikes on Thursday, with current market pricing showing fewer than three rate increases over the next year.

Zurich chief market strategist Guy Miller summarized the current interconnected effects across global bond markets: "As yields rise, markets are pulling each other along."