Ten-year government bond yields across major Western European countries have climbed above their 2023 peaks and are approaching 2007 highs, KB Securities said, with France and Germany rising sharply while Spain and Italy increase more moderately. The brokerage says the split traces back to diverging fiscal positions and echoes the run-up to the 2011 euro zone debt crisis, though it does not see an imminent crisis now.
Ten-year yields in major Western European economies have climbed above their 2023 peaks and are approaching their 2007 highs, according to KB Securities. The U.S. 10-year Treasury yield, by contrast, sits above 4.8% but remains below its 2023 peak.
The more pressing concern is the widening gap within the euro area itself. Yields in France and Germany have risen sharply, while Spain and Italy have increased at a more moderate pace and remain below their 2023 peaks. KB Securities called the divergence notable because the countries share the euro and operate under the same European Central Bank policy.
Fiscal deficits drive the split
Diverging budgets explain much of the gap. France and Germany are expected to run budget deficits of about 5% to 6% of GDP next year. Spain and Italy face projected deficits of 2% to 3%, keeping them broadly within the European Union's 3% fiscal-deficit threshold. Germany is also expected to increase borrowing to finance defence and infrastructure spending, while France has struggled to sustain fiscal-tightening measures amid political and public opposition.
Echoes of the pre-2011 crisis
The pattern recalls the period before the 2011 euro zone sovereign debt crisis, when government bond yields across member states began moving apart following the 2008 global financial crisis. KB Securities said such divergence is unusual among countries that share a currency and a common monetary policy.
Still, the brokerage does not see an imminent crisis. Yield spreads remain relatively narrow despite widening, and the bigger risk could emerge once the economic cycle turns lower. During the previous crisis, spreads began widening as early as 2008 but the situation did not escalate into a systemic crisis until the second half of 2011, after an economic slowdown had begun earlier that year.
That makes the next economic downturn a key test for European markets. When growth is strong, investors can overlook fiscal weaknesses, but a slowdown can prompt markets to reassess vulnerabilities and search for the weakest link, the report said.
Source: Investing.com
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