US, UK, and French bonds sinking into 'Debt Trap'

September 30, 2026 (MLN): US, French and UK government bond markets have passed the point at which market forces alone can rescue them, with yields on all three now at or above the structural growth rate of their economies, raising the risk of a debt trap and, in France's case, a financial crisis before the April 2027 presidential election.

Stabilising them would require government intervention such as sharp devaluations and deep spending cuts.

The warning comes from Gavekal Research in a note titled Not All Bond Markets Are Equal.

The research house said it has been bearish on bonds since mid-2020 and on French bonds since early 2020, and remains adamantly bearish on all three markets.

The 10-year US Treasury yield has broken above 5% to exceed 5.2%, against a structural nominal GDP growth rate of 6.1% (measured as a seven-year moving average).

The French 10-year OAT yields 4.74%, well above France's structural growth rate of about 3.5%. The 10-year UK gilt yields 5.36%, above Britain's roughly 5.1%.

The report said US treasuries, French OATs and UK gilts have each gone through one of the worst bear markets in their history.

Most other bond markets have also suffered, with the exception of long-dated Chinese government bonds and some Latin American debt. As a result, Swedish, Japanese, Canadian and German bonds have become buyable again.

US

The US budget deficit has reached $1.77tr, or 5.7% of GDP, driven by rising debt service and defence costs.

Debt service is running at $1.57tr a year and military spending at $1.2tr. The average rate on newly issued government debt is about 4.8%, against nominal structural growth of just over 6%.

The report said the US would fall into a debt trap if the average funding cost moved above the economy's growth rate.

That could happen if interest rates keep rising, if growth falters, or both. It said higher rates look almost certain and that long-dated Treasury yields are arguably still far too low.

Further oil price rises would slow growth by adding to the burden of higher rates. The probability of a debt trap is greater than zero and rising by the day, it said, and it maintained its advice to stay away from US treasuries.

France

The report described France as the most acute case. Its long-term rates are more than 100bp above its economy's growth rate, public debt is growing faster than GDP, and debt servicing costs are growing faster than the debt itself.

The European Central Bank has decided not to roll over its French bond holdings as they mature.

The report noted that France, as a euro member, cannot devalue.

It said the France-Germany yield spread has widened sharply since early September, which it read as a sign that a French insolvency crisis has already begun.

A major crisis before the April 2027 election would leave political decision-making paralysed and markets free to run wild, it said. It cautioned that while the return on capital in France looks high, the return of capital is far from certain.

UK

The report placed the UK somewhere between the US and France, but said that, like the US and unlike France, it can devalue.

It compared Europe's position to Asia before the 1997-98 crisis, which followed China's 1994 devaluation.

It said the recent sharp devaluation of the yen may prove the last nail in the coffin for European economies. Countries closest to the three troubled markets face the greatest contagion risk.

A slump in French and British bonds could hit Swedish bonds, which it favours, though such declines would create buying opportunities that require considerable courage. For now, the report said, the priority is avoiding the almost-certain losers rather than picking winners.

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