US Treasury yields have surged to levels not seen in two decades, presenting significant challenges for Europe and other global economies, according to Mohamed El-Erian, chief economic adviser at Allianz. The 10-year US government bond yield rose from 3.96 percent in February to a peak of 5.36 percent earlier this month, before settling around 5.10 percent. The 30-year yield also reached its highest point since 2002.
El-Erian attributes the rise in yields to two primary factors. The first is robust growth in the technology-driven private sector in the US, which has been accompanied by increased bond issuance. The second is persistently large fiscal deficits necessitating refinancing of maturing debt amid declining availability of funds from traditional long-term US bondholders. Inflationary pressures, especially from elevated diesel and energy prices, have further intensified the situation.
Given the dominant role of the US Treasury market in global finance, changes in US yields have significant spillover effects internationally. The US benefits from its status as the world’s reserve currency and its deep financial markets, which serve as a repository for global savings. However, these conditions have begun to impose financial strains on parts of Europe, exacerbating existing structural vulnerabilities.
France exemplifies the pressures affecting Europe, with its government bond yields rising to levels typically associated with peripheral Eurozone countries. The country's low economic growth and a polarized political environment ahead of the 2027 presidential election have complicated fiscal adjustments, increasing borrowing costs. Other European nations have also seen yields climb amid persistent inflation linked to high energy prices.
El-Erian warns that this dynamic could create disruptive financial feedback loops between the US and Europe. Although European governments hope for a decline in US yields, such a drop is unlikely without significant fiscal tightening in the United States. Moreover, a reduction driven by a US economic downturn could hurt global demand and trade, potentially leading to increased tariffs and restrictions that would harm Europe more severely than the current elevated yields.
Rather than relying on potential US policy changes or interventions by central banks, El-Erian urges European policymakers to focus on domestic solutions. These include fostering higher growth and productivity by reducing regulatory burdens, advancing the European Union's capital markets union to create an integrated financial market, investing in infrastructure modernization, supporting innovation and start-ups, and implementing pro-growth fiscal reforms.
The recent surge in global bond yields marks the end of an era characterized by dependence on US financial conditions and artificially low global interest rates. To mitigate the growing economic risks, Europe and other regions must develop strategies tailored to their own structural challenges.
Until that happens, the impact of rising US Treasury yields will remain a persistent and costly issue for Europe and other interconnected economies.