European markets are gripped by panic: the US debt crisis spreads, and European debt suffers a "Black Thursday".

The global bond market sell-off is spreading from US Treasuries to Europe, with European government bond yields rising sharply and spreads widening rapidly, indicating a significant increase in market concerns about a new round of debt risks.

European bond markets experienced a sharp sell-off on Thursday, with the yield on French 10-year bonds rising to 4.96%, a new high since 2002, widening the Franco-German yield spread to 1.4 percentage points. Yields on Italian and Greek bonds also rose in tandem. The yield on UK 30-year bonds broke through 6% for the first time. Meanwhile, the yield on US 10-year Treasury bonds rose to 5.34% intraday, a near 24-year high, before falling back to 5.24%.

Ed Al-Hussainy, portfolio manager at Columbia Threadneedle, warned that the market "is giving off the air of a brewing crisis."

This round of sell-off was primarily driven by renewed inflation and interest rate expectations. The Middle East conflict pushed up energy prices, with Brent crude rising 4.4% to $102.31 a barrel on Thursday; meanwhile, continued strong US economic data exacerbated market concerns about persistently high interest rates. Fiscal pressures within the European bond market, coupled with forced liquidations of highly leveraged hedge fund positions, further amplified volatility.

The sharp fluctuations in the bond market also dragged down risk assets. The pan-European Stoxx 600 index fell 1.3%, the FTSE 100 index fell 1.7%, European bank stocks were under significant pressure, and the euro fell to its lowest level in more than a year ; U.S. stocks, on the other hand, were relatively resilient, with the S&P 500 index rising 0.2% and the Nasdaq 100 index rising 0.3%.

US Treasury yields hit 25-year highs, raising warnings of a "vicious cycle".

The yield on the 10-year U.S. Treasury note rose as high as 5.34% on Thursday, a 24-year high, before falling back to close at 5.24%, down 5 basis points from the previous trading day.

Rob Subbaraman, head of global macro research at Nomura, said the recent scale of government bond sales has "shocked" traders, with higher inflation expectations and concerns about the sustainability of government deficits driving yields higher.

Mike Bell, head of market strategy at RBC BlueBay Asset Management, pointed out that a large number of investors are being forced to close out their positions or exit them as yields continue to rise, thus creating a "vicious cycle" in the market.

However, following the sharp sell-off in European bond markets, US Treasuries saw safe-haven buying. Izaac Brook, US interest rate strategist at RBC Capital Markets, stated that market focus has shifted from US fundamentals to overseas yields, with investors seeking "safe assets" and driving capital inflows into US Treasuries.

The pressure in the bond market is also beginning to spread to the real economy. Freddie Mac data shows that the traditional 30-year mortgage rate in the United States rose to 7.28% this week, a jump of 25 basis points in a single week, marking the largest weekly increase in four years.

The French budget failed to boost confidence, and political risks exacerbated pressure on the bond market.

France has become the epicenter of this round of volatility in the European bond market. The yield on French 10-year government bonds fluctuated by as much as 16 basis points during the session, twice the daily average fluctuation; the Franco-German interest rate spread widened to 1.4 percentage points, reaching its highest level since the European debt crisis.

The French government unveiled its 2027 budget on Thursday, outlining plans to cut spending by approximately €43 billion and push for tax increases, aiming to reduce the fiscal deficit to 5% of GDP. However, the market reaction remained lukewarm. ING interest rate strategist Benjamin Schroeder stated that the market had expected a more positive response to a budget reflecting fiscal consolidation efforts, but "the market skipped that step entirely."

TS Lombard economist Davide Oneglia points out that French polls show far-left candidate Jean-Luc Mélenchon's support rising in next spring's presidential election. His proposal to cancel some of the French government debt held by the central bank has become a "green light" for investors to short French government bonds.

Hedge funds forced liquidation amplified volatility in the European bond market.

According to traders cited by The Wall Street Journal, the current turmoil in the European bond market has been largely amplified by the forced deleveraging by hedge funds.

For years, a large number of investors, including hedge funds, have flocked to the French government bond market to profit from the spread between bond yields and related interest rate swaps. These trades are highly leveraged and require relatively stable bond yields. As yields have continued to climb, these positions have been liquidated in recent weeks, with Thursday's liquidation being particularly dramatic.

Blake Gwinn, head of U.S. interest rate strategy at RBC Capital Markets, said there were several “rather crowded” hot trades in the European bond market, and “all of these structured positions suffered losses.”

As French bond liquidity dries up, investors further turned to selling Italian and Greek government bonds, spreading the risk to other European bond markets and reigniting concerns about a contagion-style European debt crisis. Pooja Kumra, interest rate strategist at TD Securities, said the volatility has been “quite significant” and policymakers need to send clear signals of intervention.

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

Selling pressure in the bond market spread to the credit market, and expectations for an ECB rate hike cooled.

The impact of the bond sell-off is also beginning to spread to the corporate credit market. ICE BofA data shows that the spread between European investment-grade corporate bonds and government bonds rose to about 90 basis points this week, the highest level since April this year.

Andrew Jackson, head of investment at Vontobel Asset Management, said the risk of credit spreads widening is increasing as government bond yields rise further.

Meanwhile, policy pressure on the European Central Bank is also rising. Investors significantly reduced their bets on future ECB rate hikes on Thursday, with the market now pricing in fewer than three rate hikes over the next year.

Zurich's chief market strategist, Guy Miller, summarized the current interconnectedness of the global bond market: "As yields rise, markets are pulling each other together."

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